Costco Wholesale Corporation is an American wholesale chain with headquarters in Issaquah near Seattle, Washington State.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K --------------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NUMBER 0-20355 ------------------------ PRICE/COSTCO, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0572969 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 999 LAKE DRIVE, ISSAQUAH, WA 98027 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 313-8100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 Par Value ------------------------ 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant at October 31, 1995, was $2,863,618,868. The number of shares outstanding of the registrant's common stock as of October 31, 1995, was 195,235,264. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on February 1, 1996 are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE/COSTCO, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 1995 <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 7 Item 3. Legal Proceedings........................................... 7 Item 4. Submission of Matters to a Vote of Security Holders......... 8 Item 4A. Executive Officers of the Registrant........................ 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 10 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 14 Item 8. Financial Statements........................................ 19 Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 19 PART III Item 10. Directors and Executive Officers of the Registrant.......... 19 Item 11. Executive Compensation...................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................. 19 Item 13. Certain Relationships and Related Transactions.............. 19 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................ 19 </TABLE> 2
PART I ITEM 1 -- BUSINESS Price/Costco, Inc. ("PriceCostco" or the "Company") began operations in 1976 in San Diego, California as The Price Company ("Price"), pioneering the membership warehouse concept. Costco Wholesale Corporation ("Costco") began operations in 1983 in Seattle, Washington with a similar membership warehouse concept. PriceCostco was formed in October 1993 as a result of a merger of Price and Costco -- a combination that resulted in a company with over $15 billion in sales, more than 200 warehouse clubs in operation and in excess of 40,000 employees throughout the United States and Canada (See "Note 2 -- Merger of Price and Costco"). In the second quarter of fiscal 1995, the Company completed the spin-off of Price Enterprises, Inc. ("Price Enterprises"). Price Enterprises consisted of PriceCostco's discontinued non-club commercial real estate operations and certain other assets. (See "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations"). GENERAL PriceCostco operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories will produce rapid inventory turnover and high sales volumes. This rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables PriceCostco to operate profitably at significantly lower gross margins than traditional wholesalers, discount retailers and supermarkets. PriceCostco buys virtually all of its merchandise directly from manufacturers for shipment either directly to PriceCostco's selling warehouses or to a consolidation point where various shipments are combined so as to minimize freight and handling costs. As a result, PriceCostco eliminates many of the costs associated with multiple step distribution channels, which include purchasing from distributors as opposed to manufacturers, use of central receiving, storing and distributing warehouses and storage of merchandise in locations off the sales floor. By providing this more cost effective means of distributing goods, PriceCostco meets the needs of business customers who otherwise would pay a premium for small purchases and for the distribution services of traditional wholesalers, and who cannot otherwise obtain the full range of their product requirements from any single source. In addition, these business members will often combine personal shopping with their business purchases. Individuals shopping for their personal needs are primarily motivated by the cost savings on brand name merchandise. PriceCostco's merchandise selection is designed to appeal to both the business and consumer requirements of its members by offering a wide range of nationally branded and selected private label products, often in case, carton or multiple-pack quantities, at attractively low prices. Because of its high sales volume and rapid inventory turnover, PriceCostco generally has the opportunity to receive cash from the sale of a substantial portion of its inventory at mature warehouse operations before it is required to pay all its merchandise vendors, even though PriceCostco takes advantage of early payment terms to obtain payment discounts. As sales in a given warehouse increase and inventory turnover becomes more rapid, a greater percentage of the inventory is financed through payment terms provided by vendors rather than by working capital. PriceCostco's typical warehouse format averages approximately 125,000 square feet. Floor plans are designed for economy and efficiency in the use of selling space, in the handling of merchandise and in the control of inventory. Because shoppers are attracted principally by the availability of low prices on brand name and selected private label goods, PriceCostco's warehouses need not be located on prime commercial real estate sites or have elaborate facilities. 3
By strictly controlling the entrances and exits of its warehouses and by limiting membership to selected groups and businesses, PriceCostco has been able to limit inventory losses to less than one-half of one percent of net sales, well below those of typical discount retail operations. Losses associated with dishonored checks have also been minimal, since individual memberships are limited primarily to members of qualifying groups, and bank information from business members is verified prior to establishing a check purchase limit. Memberships are invalidated at the point of sale for those members who have issued dishonored checks to PriceCostco. PriceCostco's policy is generally to limit advertising and promotional expenses to new warehouse openings and occasional direct mail advertisements to prospective new members. These practices result in lower marketing expenses as compared to typical discount retailers and supermarkets. In connection with new warehouse openings, PriceCostco's marketing teams personally contact businesses in the area who are potential wholesale members. These contacts are supported by direct mailings during the period immediately prior to opening. Potential Gold Star (individual) members are contacted by direct mail generally distributed through credit unions, employee associations and other entities representing the individuals who are eligible for Gold Star membership. After a membership base is established in an area, most new memberships result from word of mouth advertising, follow-up contact by direct mail distributed through regular payroll or other organizational communications to employee groups, and ongoing direct solicitations of prospective wholesale members. PriceCostco's warehouses generally operate on a seven-day, 68-hour week, and are open somewhat longer during the holiday season. Generally, warehouses are open weekdays between 10:00 a.m. and 8:30 p.m. Because these hours of operation are shorter than those of traditional discount grocery retailers and supermarkets, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities of each item, thereby reducing labor required for handling and stocking. In addition, sales are processed through a centralized, automated check-out facility. Items are not individually price marked. Rather, each item is barcoded so it can be scanned into PriceCostco's electronic cash registers. This allows price changes without remarking merchandise. Substantially all manufacturers provide special, larger package sizes and merchandise pre-marked with the item numbers and bar codes. PriceCostco's merchandising strategy is to provide the customer with a broad range of high quality merchandise at prices consistently lower than could be obtained through traditional wholesalers, discount retailers or supermarkets. An important element of this strategy is to carry only those products on which PriceCostco can provide its members significant cost savings. Items which members may request but which cannot be purchased at prices low enough to pass along meaningful cost savings are usually not carried. PriceCostco seeks to limit specific items in each product line to fast selling models, sizes and colors and therefore carries only an average of approximately 3,500 to 4,500 active stockkeeping units ("SKU's") per warehouse as opposed to discount retailers and supermarkets which normally stock 40,000 to 60,000 SKU's or more. These practices are consistent with PriceCostco's membership policies of satisfying both the business and personal shopping needs of its wholesale members, thereby encouraging high volume shopping. Many consumable products are offered for sale in case, carton or multiple-pack quantities only. Appliances, equipment and tools often feature commercial and professional models. PriceCostco's policy is to accept returns of merchandise within a reasonable time after purchase. 4
The following table indicates the approximate percentage of net sales accounted for by each major category of items sold by PriceCostco during fiscal 1995, 1994 and 1993: <TABLE> <CAPTION> 1995 1994 1993 ----------- ----------- ----------- <S> <C> <C> <C> SUNDRIES (including candy, snack foods, health and beauty aids, tobacco, alcoholic beverages, soft drinks and cleaning and institutional supplies)... 32% 32% 32% FOOD (including dry and fresh foods and institutionally packaged foods)...... 32 31 31 HARDLINES (including major appliances, video and audio tape, electronics, tools, office supplies, furniture and automotive supplies).................. 22 22 21 SOFTLINES (including apparel, domestics, cameras, jewelry, housewares, books and small appliances)....................................................... 11 12 13 OTHER........................................................................ 3 3 3 --- --- --- 100% 100% 100% --- --- --- --- --- --- </TABLE> PriceCostco has direct buying relationships with many producers of national brand name merchandise. No significant portion of merchandise is obtained by PriceCostco from any one of these or other suppliers. PriceCostco has not experienced any difficulty in obtaining sufficient quantities of merchandise, and believes that if one or more of its current sources of supply became unavailable, it would be able to obtain alternative sources without experiencing a substantial disruption of its business. PriceCostco also purchases different national brand name or selected private label merchandise of the same product, as long as cost, quality and customer demand are comparable. PriceCostco is incorporated in the State of Delaware, and reports on a 52/53 week fiscal year, consisting of 13 four-week periods and ending on the Sunday nearest the end of August. The first, second and third quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). There is no material seasonal impact on PriceCostco's operations, except an increased level of sales and earnings during the Christmas holiday season. MEMBERSHIP POLICY PriceCostco's membership format is designed to reinforce customer loyalty and provide a continuing source of membership fee revenue. PriceCostco has two primary types of members; Business and Gold Star (individual members). Businesses, including individuals with a business license, retail sales license or other evidence of business existence, may become Business members. PriceCostco promotes Business membership through its merchandise selection and its membership marketing programs. Business members generally pay an annual membership fee of $30 for the primary membership card with additional membership cards available for an annual fee of $15. Individual memberships are available to employees of federal, state and local governments, financial institutions, corporations, utility and transportation companies, public and private educational institutions, and other selected organizations. Individual members generally pay an annual membership fee of $35 which includes a spouse card. As of September 3, 1995, PriceCostco had approximately 3.3 million Business memberships and approximately 6.7 million Gold Star memberships. Members can utilize their memberships at any Price Club or Costco Wholesale location. LABOR As of September 3, 1995, PriceCostco had approximately 52,000 employees, about 50% of which were part time. Substantially all of Price's 11,000 hourly employees in California, Connecticut, 5
Maryland, Massachusetts, New Jersey, New York and one Price Club warehouse in Virginia are represented by the International Brotherhood of Teamsters. All remaining hourly Price employees and all employees of Costco are non-union. PriceCostco considers its employee relations to be good. COMPETITION The Company operates in the rapidly changing and highly competitive merchandising industry. When Price pioneered the membership warehouse club concept in 1976, the dominant companies selling comparable lines of merchandise were department stores, grocery stores and traditional wholesalers. Since then, new merchandising concepts and aggressive marketing techniques have led to a more intense and focused competitive environment. Wal-Mart and Kmart have become the largest retailers in the United States and have recently expanded into food merchandising. Target has also emerged as a significant retail competitor. Approximately 850 warehouse clubs exist across the U.S. and Canada, including the 240 warehouses operated by the Company, and every major metropolitan area has some, if not several, club operations. Low cost operators selling a single category or narrow range of merchandise, such as Home Depot, Office Depot, Petsmart, Toys-R-Us, Circuit City and Barnes & Noble Books, have significant market share in their respective categories. New forms of retailing involving modern technology are boosting sales in stores such as The Sharper Image, while home shopping is becoming increasingly popular. Likewise, in the institutional food business, companies such as Smart & Final, which operates in Arizona and California, are capturing an increasingly greater share of the institutional food business from wholesale operators and others; and many supermarkets now offer food lines in bulk sizes and at prices comparable to those offered by the Company. (See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations") REGULATION Certain state laws require that the Company apply minimum markups to its selling prices for specific goods, such as tobacco products and alcoholic beverages, and prohibit the sale of specific goods, such as tobacco and alcoholic beverages, at different prices in one location. While compliance with such laws may cause the Company to charge somewhat higher prices than it otherwise would charge, other retailers are also typically governed by the same restrictions, and the Company believes that compliance with such laws does not have a material adverse effect on its operations. It is the policy of the Company to sell at lower than manufacturers' suggested retail prices. Some manufacturers attempt to maintain the resale price of their products by refusing to sell to the Company or to other purchasers that do not adhere to suggested retail prices. To date, the Company believes that it has not been materially affected by its inability to purchase directly from such manufacturers. Both federal and state legislation is proposed from time to time which, if enacted, would restrict the Company's ability to purchase goods or extend the application of laws enabling the establishment of minimum prices. The Company cannot predict the effect on its business of the enactment of such federal or state legislation. 6
ITEM 2 -- PROPERTIES WAREHOUSE PROPERTIES At September 3, 1995, PriceCostco operated warehouse clubs in 21 states, 7 Canadian provinces and the United Kingdom under the "Price Club" and "Costco Wholesale" names. The following is a summary of owned and leased warehouses by region: NUMBER OF WAREHOUSES <TABLE> <CAPTION> OWN LAND AND LEASE LAND AND/OR BUILDING BUILDING GRAND TOTALS -------------------- -------------------- -------------------- PRICE COSTCO TOTAL PRICE COSTCO TOTAL PRICE COSTCO TOTAL ----- ------ ----- ----- ------ ----- ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> UNITED STATES............................ 65 89 154 15 22 37 80 111 191 CANADA................................... 15 18 33 9 3 12 24 21 45 UNITED KINGDOM........................... -- 4 4 -- -- -- -- 4 4 ----- ------ ----- ----- ------ ----- ----- ------ ----- Grand Totals........................... 80 111 191 24 25 49 104 136 240 ----- ------ ----- ----- ------ ----- ----- ------ ----- ----- ------ ----- ----- ------ ----- ----- ------ ----- </TABLE> The following schedule shows warehouse openings (net of warehouse closings) by region for the past five fiscal years and expected openings (net of closings) through December 31, 1995: <TABLE> <CAPTION> TOTAL OTHER WAREHOUSES OPENINGS BY FISCAL YEAR UNITED STATES CANADA INTERNATIONAL TOTAL IN OPERATION - ---------------------------------------- ------------- ------- -------------- ------- ------------ <S> <C> <C> <C> <C> <C> 1990 and prior.......................... 107 12 -- 119 119 1991.................................... 13 8 -- 21 140 1992.................................... 27 3 -- 30 170 1993.................................... 23 7 -- 30 200 1994.................................... 12 7 2 21 221 1995.................................... 9 8 2 19 240 1996 (through 12/31/95)................. 2 7 1 10 250 --- ------- --- ------- Total............................... 193 52 5(a) 250 --- ------- --- ------- --- ------- --- ------- </TABLE> - ------------------------ (a) As of September 3, 1995, the Company operated (through a 50%-owned joint venture) thirteen warehouses in Mexico (one opened in fiscal 1992, two opened in fiscal 1993, five opened in fiscal 1994, and five opened in fiscal 1995). These warehouses are not included in the number of warehouses open in any period because the joint venture is accounted for on the equity basis and therefore its operations are not consolidated in the Company's financial statements. The Company's headquarters are located in Issaquah, Washington. Additionally, the Company maintains regional buying and administrative offices, operates regional cross-docking facilities for the consolidation and distribution of certain shipments to the warehouses and operates various processing and packaging facilities to support ancillary businesses. DISCONTINUED OPERATIONS - NON-CLUB REAL ESTATE SEGMENT As a result of the Exchange Transaction, the Company's business consists primarily of its warehouse club operations in the United States, Canada and the United Kingdom, and the Company has ceased to have any significant real estate activities that are not directly related to its warehouse club business. ITEM 3 -- 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. 7
Subsequently, plaintiffs filed a Second Amended Complaint which, in the opinion of the Company's counsel, alleged substantially the same facts as the prior complaint. The Complaint alleged violation of certain state and federal laws during the time period prior to Price's earnings release for the second quarter of fiscal year 1992. The case was dismissed with prejudice by the Court on March 9, 1993, on grounds the plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. The Company believes that this lawsuit is without merit and is vigorously defending the lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. On December 19, 1994, a Complaint was filed against PriceCostco in an action entitled SNYDER V. PRICE/COSTCO, INC. ET. AL., Case No. C94-1874Z, United States District Court, Western District of Washington. On January 4, 1995, a Complaint was filed against PriceCostco in an action entitled BALSAM V. PRICE/COSTCO, INC. ET. AL., Case No. C95-0009Z, United States District Court, Western District of Washington. The Snyder and Balsam Cases were subsequently consolidated and on March 15, 1995, plaintiffs' counsel filed a First Amended And Consolidated Class Action And Derivative Complaint. On November 9, 1995, plaintiffs' counsel filed a Second Amended And Consolidated Class Action And Derivative Complaint. The Second Amended Complaint alleges violation of certain state and federal laws arising from the spin-off and Exchange Transaction and the merger between Price and Costco. The Company believes that this lawsuit is without merit and is vigorously defending against this lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. 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 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting is scheduled for 10:00 a.m. on February 1, 1996 at The Pan Pacific Hotel in Anaheim, California. Matters to be voted on will be included in the Company's proxy statement to be filed with the Securities and Exchange Commission and distributed to stockholders prior to the meeting. 8
ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of the names, ages and positions of the executive officers of the registrant. <TABLE> <CAPTION> NAME AGE POSITION WITH COMPANY - -------------------- --- ------------------------------ <S> <C> <C> James D. Sinegal 59 President and Chief Executive Officer Jeffrey H. Brotman 53 Chairman of the Board Richard D. DiCerchio 52 Executive Vice President -- Merchandising, Distribution, Construction and Marketing Richard A. Galanti 39 Executive Vice President and Chief Financial Officer Franz E. Lazarus 48 Executive Vice President -- International Operations David B. Loge 53 Executive Vice President -- Manufacturing and Ancillary Businesses Walter C. Jelinek 43 Executive Vice President, Chief Operating Officer -- Northern Division Edward B. Maron 68 Executive Vice President, Chief Operating Officer -- Canadian Division Joseph P. Portera 42 Executive Vice President, Chief Operating Officer -- Eastern Division Dennis R. Zook 46 Executive Vice President, Chief Operating Officer -- Southern Division </TABLE> James D. Sinegal has been President, Chief Executive Officer and a director of the Company since October 1993 upon consummation of the merger of Costco Wholesale Corporation ("Costco") and The Price Company (the "Merger"). From its inception until 1993, he was President and Chief Operating Officer of Costco and served as Chief Executive Officer from August 1988 until October 1993. Mr. Sinegal is a co-founder of Costco and has been a director of Costco since its inception. Mr. Sinegal is a director of Price Enterprises, Inc. ("Price Enterprises") but his term as a director of Price Enterprises will expire as of that company's next election of directors on January 16, 1996. Mr. Sinegal does not intend to stand for reelection to Price Enterprise's Board of Directors. Jeffrey H. Brotman is a native of the Pacific Northwest and is a 1967 graduate of the University of Washington Law School. Mr. Brotman was elected Chairman of the Board of the Company on December 21, 1994. Mr. Brotman was the Vice Chairman of the Board of the Company from October 1993 (upon consummation of the Merger) until December 21, 1994. He is a co-founder of Costco and founder of a number of other specialty retail chains. Mr. Brotman is a director of Seafirst Bank, Starbucks Corp., The Sweet Factory and Garden Botanika. Richard D. DiCerchio has been Executive Vice President -- Merchandising, Distribution, Construction and Marketing and a director of the Company since October 1993 (upon consummation of the Merger) and, until mid-August 1994, also served as Executive Vice President, Chief Operating Officer -- Northern Division. He was elected Chief Operating Officer -- Western Region of Costco in August 1992 and was elected Executive Vice President and director of Costco in April 1986. From June 1985 to April 1986, he was Senior Vice President, Merchandising of Costco. He joined Costco as Vice President, Operations in May 1983. Richard A. Galanti has been Executive Vice President and Chief Financial Officer of PriceCostco since the Merger and has been a Director of PriceCostco since January 1995. He was Senior Vice President, Chief Financial Officer and Treasurer of Costco since January 1985, having joined Costco as Vice President - -- Finance in March 1984. From 1978 to February 1984, Mr. Galanti was an Associate with Donaldson, Lufkin & Jenrette Securities Corporation. 9
Franz E. Lazarus was named Executive Vice President -- International Operations in September, 1995, prior to which he had served as Executive Vice President, Chief Operating Officer -- Northern Division of PriceCostco since August 1994 and Executive Vice President, Chief Operating Officer -- Eastern Division since the Merger. He was named Executive Vice President, Chief Operating Officer -- East Coast Operations of Costco in August 1992. Mr. Lazarus joined Costco in November 1983 and has held various positions prior to his current position. David B. Loge has been Executive Vice President -- Manufacturing and Ancillary Businesses since August 1994. Mr. Loge joined Price as a Director of Price Club Industries in March 1989 and became Vice President of Price and President of Price Club Industries in December 1990. Prior to joining Price, he served as Vice President of Operations of Sundale Beverage in Belmont, California. Walter C. ("Craig") Jelinek has been Executive Vice President, Chief Operating Officer -- Northern Division since September 1995. He had been Senior Vice President, Operations -- Northwest Region since September 1992. From May 1986 to September 1994 he was Vice President, Regional Operations Manager -- Los Angeles Region and has held various management positions since joining Costco in April 1984. Edward B. Maron has been Executive Vice President, Chief Operating Officer - -- Canadian Division of PriceCostco since the Merger. He had been Senior Vice President -- Canadian Division of Costco since April 1990. He has held various management positions since joining Costco in June 1985. Joseph P. Portera has been Executive Vice President, Chief Operating Officer - -- Eastern Division of PriceCostco since August, 1994. He was Senior Vice President, Operations -- Northern California Region from October, 1993 to August 1994. From August 1991 to October 1993 he was Senior Vice President, Merchandising -- Non Foods of Costco, and has held various management positions since joining Costco in April 1984. Dennis R. Zook has been Executive Vice President, Chief Operating Officer -- Southern Division of PriceCostco since the Merger. He was Executive Vice President of Price since February 1989. Mr. Zook became Vice President of West Coast Operations of Price in October 1988 and has held various management positions since joining Price in October 1981. PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Trading in PriceCostco Common Stock commenced on October 22, 1993, and is quoted on The Nasdaq Stock Market's National Market under the symbol "PCCW." Prior to October 21, 1993, Price Common Stock was quoted on The Nasdaq Stock Market's National Market under the symbol "PCLB" and Costco Common Stock was quoted on The Nasdaq Stock Market's National Market under the symbol "COST." In the Merger between Price and Costco, which occurred on October 21, 1993, each share of Price Common Stock, par value $.10 per share, was exchanged for 2.13 shares of PriceCostco Common Stock and each share of Costco Common Stock, par value $.0033 per share, was exchanged for one share of PriceCostco Common Stock. 10
The following table sets forth the high and low sales prices of PriceCostco Common Stock for the period October 22, 1993 through October 31, 1995, and Price Common Stock and Costco Common Stock for the periods indicated. All Price Common Stock data below has been adjusted to reflect the 2.13 exchange ratio in the Merger. The quotations are as reported in published financial sources. <TABLE> <CAPTION> PRICE COSTCO PRICECOSTCO COMMON STOCK COMMON STOCK COMMON STOCK ------------------ ------------------ ------------------ HIGH LOW HIGH LOW HIGH LOW ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Calendar Quarters -- 1993 First Quarter............................................. 18 3/4 14 3/4 25 1/4 18 1/2 -- -- Second Quarter............................................ 18 1/2 13 1/4 19 3/4 15 3/4 -- -- Third Quarter............................................. 18 14 3/4 18 1/2 15 -- -- Fourth Quarter (through October 21, 1993)................. 19 7/8 17 1/2 19 5/8 16 3/4 -- -- Fourth Quarter (October 22, 1993 through December 31, 1993)..................................................... -- -- -- -- 21 3/8 17 1/8 Calendar Quarters -- 1994 First Quarter............................................. -- -- -- -- 21 5/8 16 7/8 Second Quarter............................................ -- -- -- -- 18 1/4 13 Third Quarter............................................. -- -- -- -- 16 1/2 13 3/4 Fourth Quarter............................................ -- -- -- -- 16 3/4 12 1/2 Calendar Quarters -- 1995 First Quarter............................................. -- -- -- -- 15 1/8 12 Second Quarter............................................ -- -- -- -- 16 5/8 13 5/16 Third Quarter............................................. -- -- -- -- 19 1/2 16 1/4 Fourth Quarter (through October 31, 1995)................. -- -- -- -- 18 1/8 16 3/8 </TABLE> On October 31, 1995, the last reported sales price per share of PriceCostco Common Stock was $17.00. On October 31, 1995, the Company had 9,025 stockholders of record. DIVIDEND POLICY PriceCostco does not pay regular dividends and does not anticipate the declaration of a cash dividend in the forseeable future. Under its two revolving credit agreements, PriceCostco is generally permitted to pay dividends in any fiscal year up to an amount equal to 50% of its consolidated net income for that fiscal year. ITEM 6 -- SELECTED FINANCIAL DATA SELECTED FINANCIAL AND OPERATING DATA The following tables set forth selected financial and operating data for the ten fiscal years in the period ended September 3, 1995 for PriceCostco, giving effect to the Merger using the pooling-of-interests method of accounting and treating the non-club real estate segment as a discontinued operation. This selected financial and operating data should be read in conjunction with "Item 7 - -- Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements of PriceCostco for fiscal 1995. 11
PRICE/COSTCO, INC. SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED SEPTEMBER 3, AUGUST 28, AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2, 1995 1994 1993 1992 1991 1990 ------------ ----------- ----------- ----------- ------------ ------------ <S> <C> <C> <C> <C> <C> <C> OPERATING DATA Revenue Net sales............................. $17,905,926 $16,160,911 $15,154,685 $13,820,380 $11,813,509 $9,346,099 Membership fees and other............. 341,360 319,732 309,129 276,998 228,742 185,144 ------------ ----------- ----------- ----------- ------------ ------------ Total revenue......................... 18,247,286 16,480,643 15,463,814 14,097,378 12,042,251 9,531,243 Operating expenses Merchandise costs..................... 16,225,848 14,662,891 13,751,153 12,565,463 10,755,823 8,518,951 S,G&A expenses........................ 1,555,588 1,425,549 1,314,660 1,128,898 934,120 719,446 Preopening expenses................... 25,018 24,564 28,172 25,595 16,289 11,691 Provision for estimated warehouse closing costs........................ 7,500 7,500 5,000 2,000 1,850 6,000 ------------ ----------- ----------- ----------- ------------ ------------ Operating income...................... 433,332 360,139 364,829 375,422 334,169 275,155 Other income (expense) Interest expense...................... (67,911) (50,472) (46,116) (35,525) (26,041) (18,769) Interest income and other............. 2,783 13,888 17,750 28,958 33,913 19,239 Provision for merger and restructuring expenses............................. -- (120,000) -- -- -- -- ------------ ----------- ----------- ----------- ------------ ------------ Income from continuing operations before provision for income taxes............. 368,204 203,555 336,463 368,855 342,041 275,625 Provision for income taxes.............. 150,963 92,657 133,620 145,833 134,748 107,899 ------------ ----------- ----------- ----------- ------------ ------------ Income from continuing operations....... 217,241 110,898 202,843 223,022 207,293 167,726 Discontinued operations: Income (loss), net of tax........... -- (40,766) 20,404 19,385 11,566 6,854 Loss on disposal.................... (83,363) (182,500) -- -- -- -- Extraordinary items..................... -- -- -- -- -- -- ------------ ----------- ----------- ----------- ------------ ------------ Net income (loss)....................... $ 133,878 $ (112,368) $ 223,247 $ 242,407 $ 218,859 $ 174,580 ------------ ----------- ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------ ------------ Per Share Data -- Fully Diluted Income from continuing operations..... $ 1.05 $ 0.51 $ 0.92 $ 0.98 $ 0.93 $ 0.79 Discontinued Operations: Income (loss), net of tax........... -- (0.19) 0.08 0.08 0.05 0.03 Loss on Disposal.................... (0.37) (0.83) -- -- -- -- Extraordinary items................... -- -- -- -- -- -- ------------ ----------- ----------- ----------- ------------ ------------ Net income (loss)..................... $ 0.68 $ (0.51) $ 1.00 $ 1.06 $ 0.98 $ 0.82 ------------ ----------- ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------ ------------ Shares used in calculation............ 224,079 219,334 240,162 245,090 234,202 219,532 <CAPTION> 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED SEPTEMBER 3, AUGUST 28, AUGUST 30, AUGUST 31, 1989 1988 1987 1986 ------------ ---------- ---------- ---------- <S> <C> <C> <C> <C> OPERATING DATA Revenue Net sales............................. $7,844,539 $6,042,159 $4,606,352 $3,337,361 Membership fees and other............. 157,621 125,985 98,201 70,695 ------------ ---------- ---------- ---------- Total revenue......................... 8,002,160 6,168,144 4,704,553 3,408,056 Operating expenses Merchandise costs..................... 7,168,907 5,531,626 4,198,768 3,040,115 S,G&A expenses........................ 590,465 458,013 355,178 256,407 Preopening expenses................... 11,685 6,509 12,784 4,031 Provision for estimated warehouse closing costs........................ 1,609 4,000 -- -- ------------ ---------- ---------- ---------- Operating income...................... 229,494 167,996 137,823 107,503 Other income (expense) Interest expense...................... (24,583) (20,949) (13,840) (8,249) Interest income and other............. 24,275 22,341 20,936 21,281 Provision for merger and restructuring expenses............................. -- -- -- -- ------------ ---------- ---------- ---------- Income from continuing operations before provision for income taxes............. 229,186 169,388 144,919 120,535 Provision for income taxes.............. 88,742 67,533 68,019 58,162 ------------ ---------- ---------- ---------- Income from continuing operations....... 140,444 101,855 76,900 62,373 Discontinued operations: Income (loss), net of tax........... 3,600 -- -- -- Loss on disposal.................... -- -- -- -- Extraordinary items..................... -- 2,856 1,510 995 ------------ ---------- ---------- ---------- Net income (loss)....................... $ 144,044 $ 104,711 $ 78,410 $ 63,368 ------------ ---------- ---------- ---------- ------------ ---------- ---------- ---------- Per Share Data -- Fully Diluted Income from continuing operations..... $ 0.69 $ 0.56 $ 0.42 $ 0.37 Discontinued Operations: Income (loss), net of tax........... 0.02 -- -- -- Loss on Disposal.................... -- -- -- -- Extraordinary items................... -- 0.02 0.01 0.01 ------------ ---------- ---------- ---------- Net income (loss)..................... $ 0.71 $ 0.58 $ 0.43 $ 0.38 ------------ ---------- ---------- ---------- ------------ ---------- ---------- ---------- Shares used in calculation............ 212,772 181,336 180,887 168,324 </TABLE> 12
PRICE/COSTCO, INC. SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT WAREHOUSE AND PER SHARE DATA) <TABLE> <CAPTION> SEPTEMBER 3, AUGUST 28, AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2, SEPTEMBER 3, AUGUST 28, 1995 1994 1993 1992 1991 1990 1989 1988 ------------ ---------- ---------- ---------- ------------ ------------ ------------ ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE SHEET DATA Working capital (deficit).............. $ 9,381 $ (113,009) $ 127,312 $ 281,592 $ 304,703 $ 14,342 $ 103,252 $ 208,569 Property and equipment, net.................... 2,535,593 2,146,396 1,966,601 1,704,052 1,183,432 935,767 752,912 511,784 Total assets............ 4,437,419 4,235,659 3,930,799 3,576,543 2,986,094 2,029,931 1,740,332 1,445,814 Short-term debt......... 75,725 149,340 23,093 -- -- 139,414 114,000 -- Long-term debt and capital lease obligations, net....... 1,094,615 795,492 812,576 813,976 500,440 199,506 234,017 327,760 Stockholders' equity (a)(b)................. 1,530,744 1,684,960 1,796,728 1,593,943 1,429,703 988,458 777,730 585,598 WAREHOUSES IN OPERATION Beginning of year....... 221 200 170 140 119 104 84 77 Opened.................. 24 29 37 31 23 19 20 10 Closed.................. (5) (8) (7) (1) (2) (4) -- (3) ------------ ---------- ---------- ---------- ------------ ------------ ------------ ---------- End of Year............. 240 221 200 170 140 119 104 84 ------------ ---------- ---------- ---------- ------------ ------------ ------------ ---------- ------------ ---------- ---------- ---------- ------------ ------------ ------------ ---------- <CAPTION> AUGUST 30, AUGUST 31, 1987 1986 ---------- ----------- <S> <C> <C> BALANCE SHEET DATA Working capital (deficit).............. $ 244,783 $ 173,765 Property and equipment, net.................... 411,590 234,813 Total assets............ 1,205,843 769,799 Short-term debt......... -- -- Long-term debt and capital lease obligations, net....... 333,503 124,475 Stockholders' equity (a)(b)................. 468,045 384,275 WAREHOUSES IN OPERATION Beginning of year....... 47 36 Opened.................. 30 11 Closed.................. -- -- ---------- ----------- End of Year............. 77 47 ---------- ----------- ---------- ----------- </TABLE> - ------------------------ (a) In 1989 Price paid to its shareholders a one-time special cash dividend of $74,621 or $1.50 per share of Price Common Stock. (b) In 1989 stockholders' equity reflects a $20,100 reduction of retained earnings related to conforming Price's accounting for income tax method to Costco's accounting for income tax method as of fiscal 1989. 13
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FISCAL 1995 (53 WEEKS) AND FISCAL 1994 (52 WEEKS): (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Net operating results for fiscal 1995 reflect net income of $133,878 or $.68 per share (fully diluted), as compared to a fiscal 1994 net loss of $112,368 or $.51 per share (fully diluted). The fiscal 1995 results include a non-cash charge of $83,363 or $.37 per share, reflecting the final calculation for the loss on the disposal of the discontinued real estate operations following the completion of the Spin-off of Price Enterprises. The fiscal 1994 loss of $112,368 includes the provision for merger and restructuring costs of $120,000 pre-tax ($80,000 or $.36 per share after tax), a provision included in loss from discontinued operations of $80,500 pre-tax ($47,500 or $.22 per share after tax) arising from a change in accounting estimates caused by the Exchange Transaction, and a non-cash charge of $182,500, or $.83 per share, reflecting the estimated loss on disposal of the discontinued non-club real estate operations. CONTINUING OPERATIONS Income from continuing operations for fiscal 1995 was $217,241 or $1.05 per share, compared to income from continuing operations for fiscal 1994 of $110,898 or $.51 per share. Excluding the $120,000 pre-tax ($80,000 after tax) merger and restructuring charge, income from continuing operations for fiscal 1994 would have been $190,898 or $.87 per share. Net sales increased 10.8% to $17,905,926 in fiscal 1995 from $16,160,911 in fiscal 1994. This increase was due to: (i) first year sales at the 24 new warehouses opened during fiscal 1995, which increase was partially offset by 5 warehouses closed during fiscal 1995 that were in operation during fiscal 1994; (ii) increased sales at 29 warehouses that were opened in fiscal 1994 and that were in operation for the entire 1995 fiscal year; (iii) higher sales at existing locations opened prior to fiscal 1994; and (iv) one additional week of sales related to having a 53-week fiscal year. Changes in prices did not materially impact sales levels. Comparable sales, that is sales in warehouses open for at least a year, increased at a 2% annual rate in fiscal 1995, compared to a negative 3% annual rate during fiscal 1994. The improvement in comparable sales levels in fiscal 1995, as compared to fiscal 1994, reflects new marketing and merchandising efforts, including the rollout of fresh foods and various ancillary businesses to certain existing locations. Membership fees and other revenue increased 6.8% from $319,732, or 1.98% of net sales, in fiscal 1994 to $341,360, or 1.91% of net sales in fiscal 1995. This increase is primarily due to membership sign-ups at the 24 new warehouses opened in fiscal 1995 and one additional week of membership fees related to having a 53-week fiscal year. Gross margin (defined as net sales minus merchandise costs) increased 12.2% from $1,498,020, or 9.27% of net sales in fiscal 1994 to $1,680,078, or 9.38% of net sales in fiscal 1995. Gross margin as a percentage of net sales increased due to greater purchasing power realized since the Merger and the expanded use of the Company's depot facilities. The gross margin figures reflect accounting for most U.S merchandise inventories on the last-in, first-out (LIFO) method. For fiscal 1995 there was a $9,500 LIFO provision, or $.03 per share (fully diluted), decreasing income after tax due to the use of the LIFO method compared to the first-in, first-out (FIFO) method. This compares to a $2,600 LIFO benefit or $.01 per share (fully diluted) in fiscal 1994. Selling, general and administrative expenses as a percent of net sales improved from 8.82% during fiscal 1994 to 8.69% during fiscal 1995, reflecting lower expense ratios resulting from improved comparable sales increases, as well as the implementation of front-end scanning and automated receiving at certain existing warehouses, partially offset by higher expenses associated with international expansion and certain ancillary operations. Preopening expenses totaled $25,018 or 0.14% of net sales during fiscal 1995 and $24,564 or 0.15% of net sales during fiscal 1994. During fiscal 1995, the Company opened 24 new warehouses 14
compared to opening 29 new warehouses during fiscal 1994. Fiscal 1995 preopening expenses also included an increased level of costs associated with remodels and expanding fresh foods and ancillary operations at existing warehouses. The Company recorded a pre-tax provision for warehouse closing costs of $7,500 or $.02 per share on an after-tax basis (fully diluted). The provision includes estimated closing costs for certain warehouses, which were or will be replaced by new warehouses, the closing of a regional office and additional costs related to warehouse clubs closed in prior years. Warehouse closing costs were also $7,500 (pre-tax) or $.02 per share in fiscal 1994. Interest expense totaled $67,911 in fiscal 1995, and $50,472 in fiscal 1994. In both fiscal years, interest expense was incurred as a result of the interest on the convertible subordinated debentures and interest on borrowings on the Company's bank lines and commercial paper programs. Interest expense in fiscal 1995 also includes interest on the Senior Notes (as hereafter defined) issued in June, 1995. The increase in interest expense is primarily related to higher borrowings and interest rates under the Company's bank lines and commercial paper programs and the issuance of the Senior Notes. Interest income and other totaled $2,783 in fiscal 1995, and $13,888 in fiscal 1994. This decrease was primarily due to the Company reflecting its share of losses in certain unconsolidated joint ventures, the elimination of interest income on certain notes receivable that were transferred to Price Enterprises as of fiscal 1994 year-end, and an approximate $2,500 pre-tax charge representing the Company's share of foreign currency exchange losses incurred by Price Club Mexico due to Mexico's currency devaluation during fiscal 1995. The $120,000 pre-tax provision for merger and restructuring costs reflected in fiscal 1994 includes direct transaction costs, expenses related to consolidating and restructuring certain functions, the closing of certain facilities and disposal of related properties, severance and employee payouts, write-offs of certain redundant capitalized costs and certain other costs. These costs were provided for in the first quarter of fiscal 1994. For additional information see "Note 2 -- Merger of Price and Costco" to the consolidated financial statements. In fiscal 1995 and 1994, the effective income tax rate on income from continuing operations before provision for income taxes was 41.0% (excluding the merger and restructuring charges in fiscal 1994). DISCONTINUED OPERATIONS Income from discontinued real estate operations is not included in operating results for periods subsequent to the announcement date (fourth quarter of fiscal 1994) and through the date of disposal (second quarter of fiscal 1995). The fiscal 1994 loss on discontinued real estate operations (net of operating expenses and taxes) included the results of income-producing properties, gains on sale of property, interest income and a provision of $90,200 pre-tax, of which $80,500 pre-tax ($47,500 after tax or $.22 per share) related to a change in calculating estimated losses for assets which were considered to be economically impaired. This change in accounting estimates resulted from the spin-off of the real estate segment assets into Price Enterprises, and Price Enterprises' decision to pursue business plans and operating strategies as a stand-alone entity which were significantly different than the strategies of the Company. Discontinued operations in fiscal 1995 includes a non-cash charge of $83,363 or $.37 per share, reflecting the final calculation for the loss on disposal of the discontinued real estate operations. Fiscal 1994 includes a $182,500 or $.83 per share charge for the estimated loss on the disposal of the discontinued real estate operations. These charges relate to the transfer of the Company's commercial real estate operations, together with certain other assets, to Price Enterprises as part of the Exchange Transaction. The Exchange Transaction was completed on December 20, 1994, and the estimated loss on disposal was adjusted to actual. For a more detailed discussion of the Exchange Transaction, see "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations." 15
COMPARISON OF FISCAL 1994 (52 WEEKS) AND FISCAL 1993 (52 WEEKS): (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Net operating results for fiscal 1994 reflected a net loss of $112,368 or $.51 per share (fully diluted), as compared to fiscal 1993 net income of $223,247 or $1.00 per share (fully diluted). The fiscal 1994 net loss included the provision for merger and restructuring costs of $120,000 pre-tax ($80,000 or $.36 per share after tax), a non-cash provision of $80,500 pre-tax ($47,500 or $.22 per share after tax) arising from a change in accounting estimates caused by the Exchange Transaction, and a non-cash charge of $182,500, or $.83 per share, reflecting the estimated loss on disposal of the discontinued non-club real estate operations. CONTINUING OPERATIONS Income from continuing operations for fiscal 1994 was $110,898 or $.51 per share, compared to income from continuing operations for fiscal 1993 of $202,843 or $.92 per share. Excluding the $120,000 pre-tax merger and restructuring charge, income from continuing operations for fiscal 1994 would have been $190,898 or $.87 per share. Net sales increased 6.6% to $16,160,911 in fiscal 1994 from $15,154,685 in fiscal 1993. This increase was due to: (i) first year sales at the 29 new warehouses opened during fiscal 1994, which increase was partially offset by eight warehouses closed during fiscal 1994 that were in operation during fiscal 1993; and (ii) increased sales at 37 warehouses that were opened in 1993 and that were in operation for the entire 1994 fiscal year, which increase was partially offset by lower sales at existing locations opened prior to fiscal 1993. Changes in prices did not materially affect sales levels. Comparable sales, that is sales in warehouses open for at least a year, were a negative 3% annual rate in fiscal 1994 -- similar to the negative 3% annual rate during fiscal 1993. The negative rate of comparable sales was attributed to several factors, including the following: the effect of sales cannibalization by opening additional warehouses in existing markets; increased competition in several markets; deflation in several merchandise categories; a generally poor economic environment, especially in California; and a weak Canadian dollar where the Company derived 16% and 15% of net sales in fiscal 1994 and 1993, respectively. Membership fees and other revenue increased 3.4% from $309,129, or 2.04% of net sales, in fiscal 1993 to $319,732, or 1.98% of net sales in fiscal 1994. This increase reflects a continued strong membership base at existing warehouses, membership sign-ups at the 29 new warehouses and an annualized effect of membership fee increases in certain markets implemented in fiscal 1993. Gross margin (defined as net sales minus merchandise costs) increased 6.7% from $1,403,532, or 9.26% of net sales in fiscal 1993 to $1,498,020, or 9.27% of net sales in fiscal 1994. The gross margin figures reflect accounting for merchandise inventory costs on the last-in, first-out (LIFO) method. For fiscal 1994 there was a $2,600 LIFO benefit or $.01 per share (fully diluted) to increase income after tax due to the use of the LIFO method compared to the first-in, first-out (FIFO) method. This compares to a $5,350 LIFO benefit or $.01 per share (fully diluted) in fiscal 1993. Selling, general and administrative expenses as a percent of net sales increased from 8.67% during fiscal 1993 to 8.82% during fiscal 1994, reflecting a combination of comparable unit sales decreases in the 200 warehouses in operation during both fiscal periods; higher expense ratios at the 29 units opened during fiscal 1994 (newer units generally operate at significantly lower annual sales volumes than mature units and, therefore, incur higher expense ratios than mature units); and higher expense factors associated with certain ancillary operations. Preopening expenses totaled $28,172 or 0.19% of net sales during fiscal 1993, and $24,564 or 0.15% of net sales during fiscal 1994. During fiscal 1994, the Company opened 29 new warehouses compared to opening 37 new warehouses during fiscal 1993. The Company recorded a pre-tax provision for warehouse closing costs of $7,500 or $.02 per share on an after-tax basis (fully diluted). The provision included $5,750 (pre-tax) related to settlement of a 16
lease dispute and additional closing costs related to warehouse clubs closed in prior years, and $1,750 (pre-tax) related to the estimated closing costs of six warehouses which were replaced by new warehouses. This compared to $5,000 (pre-tax) or $.01 per share in fiscal 1993. Interest expense totaled $46,116 in fiscal 1993 and $50,472 in fiscal 1994. In both fiscal years interest expense was incurred as a result of the interest on the convertible subordinated debentures and interest on borrowings on the Company's bank lines and commercial paper programs. Interest income and other totaled $17,750 in fiscal 1993, and $13,888 in fiscal 1994. This decrease was primarily due to lower average investment balances and lower interest rates. The effective income tax rate (excluding the merger and restructuring charge and loss on disposal of the discontinued operations) on earnings in fiscal 1994 was 41.0%, compared to 39.7% in the prior year. The Company's effective income tax rate increased due to a higher federal statutory rate implemented in the Company's fourth quarter of fiscal 1993 and by changes in the impact of foreign operations on the effective tax rate. DISCONTINUED OPERATIONS Income from discontinued real estate operations (net of operating expenses and taxes) was $20,404 or $.08 per share in fiscal 1993, compared to a loss from discontinued real estate operations of $40,766 or $.19 per share in fiscal 1994. Discontinued real estate operations include the results of income producing properties, gains on sale of property, and interest income. In fiscal 1994 the results included a provision of $90,200 pre-tax of which $80,500 pre-tax ($47,500 after tax or $.22 per share) related to a change in calculating estimated losses for assets which are considered to be economically impaired. The loss on disposal of the discontinued real estate operations of $182,500 or $.83 per share, reflected in the fourth quarter of fiscal 1994, related to the transfer of the Company's commercial real estate operations, together with certain other assets, to Price Enterprises as part of the Exchange Transaction. For a description of the Exchange Transaction, see "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations." RECENT SALES RESULTS PriceCostco's net sales for the eight-week period ended October 29, 1995 were approximately $2,756,000 an increase of 9.2% from approximately $2,524,000 for the same eight-week period of the prior fiscal year. Comparable warehouse sales (sales in warehouses open for at least a year) increased by 3 percent during the eight-week period. LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS) PriceCostco's primary requirement for capital is the financing of the land, building and equipment costs for new warehouses plus the costs of initial warehouse operations and working capital requirements, as well as additional capital for international expansion through investments in foreign subsidiaries and joint ventures. In fiscal 1995, cash provided from operations was approximately $278,000. In June 1995, the Company issued $300,000 of 7 1/8% Senior Notes due June 15, 2005 (the "Senior Notes"). The net proceeds from the sale of the Senior Notes were used to repay existing indebtedness incurred under the Company's $500,000 commercial paper program. The Senior Notes indenture contains limitations on the Company's and certain subsidiaries ability to create liens securing indebtedness and to enter certain sale-leaseback transactions. Cash flow from operations, borrowings under the Company's commercial paper program and the proceeds from the Senior Notes provided the primary sources of funds for additions to property and equipment for warehouse clubs and related operations of $531,000 and other investing activities related primarily to investments in unconsolidated joint ventures of $11,500. 17
Expansion plans for the United States and Canada during fiscal 1996 are to open 20-25 new warehouse clubs. The Company also expects to continue expansion of its international operations. To date the Company has opened four warehouses in the United Kingdom through a 60%-owned subsidiary, and plans to open three to four additional United Kingdom units during fiscal 1996. Other markets are being assessed, particularly in the Pacific Rim, and include the planned opening of a warehouse club location in Taiwan during the summer of 1996. 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. See "Note 4 -- Acquisition of Price Enterprises' Interest in Price Club Mexico" in Notes to Consolidated Financial Statements. As of September 3, 1995, Price Club Mexico operated 13 Price Club warehouses in Mexico. While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management's current intention to spend an aggregate of approximately $450,000 to $500,000 during fiscal 1996 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $50,000 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 $45,688 at September 3, 1995), short-term borrowings under revolving credit facilities and/or commercial paper facilities, and other financing sources as required. The Company has a domestic multiple-option loan facility with a group of 13 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 30, 1996, and $250,000 expires on January 30, 1998. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At September 3, 1995, no amounts were outstanding under the loan facility and $51,965 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 30, 1996 at substantially the same terms. In addition, the Company's wholly-owned Canadian subsidiary has a $103,000 commercial paper program supported by a bank credit facility with three Canadian banks, of which $63,000 will expire in April 1996 and $40,000 will expire in April 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At September 3, 1995, no amounts were outstanding under the bank credit facility and $23,760 was outstanding under the Canadian commercial paper program. The Company also has separate letter of credit facilities (for commercial and standby letters of credit), totaling approximately $196,000. The outstanding commitments under these facilities at September 3, 1995 totaled approximately $127,000, including approximately $51,000 in standby letters of credit for workers' compensation requirements. Due to rapid inventory turnover, the Company's operations provide a higher level of supplier trade payables than generally encountered in other forms of retailing. When combined with other current liabilities, the resulting amount typically approaches the current assets needed to operate the business (e.g., merchandise inventories, accounts receivable and other current assets). At September 3, 1995, working capital totaled $9,000 compared to a working capital (deficit) of ($113,000) at August 28, 1994. This increase in net working capital is primarily related to reductions in notes payable of $74,000 as long-term debt proceeds were used to refinance certain short-term borrowings. In fiscal 1994, cash provided from operations was approximately $248,000. These funds, combined with beginning fiscal year balances of cash, cash equivalents and short-term investments, along with borrowings under the Company's commerical paper program were used to finance: 1) additions to property and equipment for warehouse clubs and related operations of $475,000; 2) net inventory 18
investment (merchandise inventories less accounts payable) of $66,000; and 3) other investing activities related primarily to net discontinued operations and investments in unconsolidated joint ventures, which together totaled approximately $73,500. ITEM 8 -- FINANCIAL STATEMENTS Financial statements of PriceCostco are as follows: <TABLE> <CAPTION> PAGE --------- <S> <C> Report of Independent Public Accountants................................................................... 22 Consolidated Balance Sheets, as of September 3, 1995 and August 28, 1994................................... 23 Consolidated Statements of Operations, for the 53 weeks ended September 3, 1995 and the 52 weeks ended August 28, 1994, and August 29, 1993...................................................................... 24 Consolidated Statements of Stockholders' Equity, for the 53 weeks ended September 3, 1995 and the 52 weeks ended August 28, 1994, and August 29, 1993................................................................ 25 Consolidated Statements of Cash Flows, for the 53 weeks ended September 3, 1995 and the 52 weeks ended August 28, 1994, and August 29, 1993...................................................................... 26 Notes to Consolidated Financial Statements................................................................. 27 </TABLE> ITEM 9 -- CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information with respect to the executive officers of the Registrant, see Item 4A -- "Executive Officers of the Registrant" at the end of Part I of this report. The information required by this Item concerning the Directors and nominees for Director of the Company is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders, to be held on February 1, 1996, to be filed with the Commission pursuant to Regulation 14A. ITEM 11 -- EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders, to be held on February 1, 1996, to be filed with the Commission pursuant to Regulation 14A. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders to be held on February 1, 1996, to be filed with the Commission pursuant to Regulation 14A. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders, to be held on February 1, 1996, to be filed with the Commission pursuant to Regulation 14A. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report are as follows: 1. Financial Statements: See listing of Financial Statements included as a part of this Form 10-K on Item 8 of Part II. 2. Financial Statement Schedules -- None. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this Annual Report. 3. Exhibits: The required exhibits are included at the end of the Form 10-K Annual Report and are described in the Exhibit Index immediately preceding the first exhibit. 19
SIGNATURES Pursuant to the requirements of Section 13 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. November 22, 1995 Price/Costco, Inc. (Registrant) By /s/ RICHARD A. GALANTI -------------------------------------- Richard A. Galanti EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <S> <C> By /s/ JAMES D. SINEGAL November 22, 1995 ---------------------------------------- James D. Sinegal PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR By /s/ JEFFREY H. BROTMAN November 22, 1995 ---------------------------------------- Jeffrey H. Brotman CHAIRMAN OF THE BOARD By /s/ RICHARD D. DICERCHIO November 22, 1995 ---------------------------------------- Richard D. DiCerchio EXECUTIVE VICE PRESIDENT -- MERCHANDISING, DISTRIBUTION, CONSTRUCTION AND MARKETING AND DIRECTOR By /s/ RICHARD A. GALANTI November 22, 1995 ---------------------------------------- Richard A. Galanti EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER) By /s/ DAVID S. PETTERSON November 22, 1995 ---------------------------------------- David S. Petterson SENIOR VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) By /s/ DANIEL BERNARD November 22, 1995 ---------------------------------------- Daniel Bernard DIRECTOR </TABLE> 20
<TABLE> <S> <C> By /s/ HAMILTON E. JAMES November 22, 1995 ---------------------------------------- Hamilton E. James DIRECTOR By /s/ RICHARD M. LIBENSON November 22, 1995 ---------------------------------------- Richard M. Libenson DIRECTOR By /s/ JOHN W. MEISENBACH November 22, 1995 ---------------------------------------- John W. Meisenbach DIRECTOR By /s/ FREDERICK O. PAULSELL November 22, 1995 ---------------------------------------- Frederick O. Paulsell DIRECTOR </TABLE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Price/Costco, Inc.: We have audited the accompanying consolidated balance sheets of Price/Costco, Inc. (a Delaware corporation) and subsidiaries (PriceCostco) as of September 3, 1995 and August 28, 1994, and the related statements of operations, stockholders' equity and cash flows for the 53-week period ended September 3, 1995, and the 52-week periods ended August 28, 1994 and August 29, 1993. These financial statements are the responsibility of PriceCostco's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of The Price Company and subsidiaries (Price), which statements reflect total revenues of 51% of the consolidated totals for the 52-week period ended August 29, 1993. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Price, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PriceCostco as of September 3, 1995 and August 28, 1994, and the results of its operations and its cash flows for the 53-week period ended September 3, 1995, and the 52-week periods ended August 28, 1994, and August 29, 1993 in conformity with generally accepted accounting principles. Arthur Andersen LLP Seattle, Washington October 25, 1995 22
PRICE/COSTCO, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS <TABLE> <CAPTION> AUGUST 28, SEPTEMBER 3, 1995 1994 ----------------- -------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents................................................... $ 45,688 $ 53,638 Short-term investments and restricted cash.................................. -- 9,268 Receivables, net............................................................ 146,665 130,278 Merchandise inventories, net................................................ 1,422,272 1,260,476 Other current assets........................................................ 87,694 80,638 ----------------- -------------- Total current assets...................................................... 1,702,319 1,534,298 ----------------- -------------- PROPERTY AND EQUIPMENT Land, land rights, and land improvements.................................... 1,143,860 975,439 Buildings and leasehold improvements........................................ 1,215,706 994,492 Equipment and fixtures...................................................... 624,398 523,310 Construction in progress.................................................... 78,071 78,264 ----------------- -------------- 3,062,035 2,571,505 Less -- accumulated depreciation and amortization........................... (526,442) (425,109) ----------------- -------------- Net property and equipment................................................ 2,535,593 2,146,396 ----------------- -------------- OTHER ASSETS................................................................ 199,507 177,880 DISCONTINUED OPERATIONS --NET ASSETS........................................ -- 377,085 ----------------- -------------- $ 4,437,419 $ 4,235,659 ----------------- -------------- ----------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank checks outstanding, less cash on deposit............................... $ 12,721 $ 6,804 Notes payable............................................................... 75,725 149,340 Accounts payable............................................................ 1,233,128 1,073,326 Accrued salaries and benefits............................................... 205,236 207,570 Accrued sales and other taxes............................................... 91,843 81,736 Other current liabilities................................................... 74,285 128,531 ----------------- -------------- Total current liabilities................................................. 1,692,938 1,647,307 LONG-TERM DEBT................................................................ 1,094,615 795,492 DEFERRED INCOME TAXES......................................................... 64,293 65,679 OTHER LIABILITIES............................................................. 3,991 7,442 ----------------- -------------- Total liabilities......................................................... 2,855,837 2,515,920 ----------------- -------------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST............................................................. 50,838 34,779 STOCKHOLDERS' EQUITY Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding..................................................... -- -- Common stock $.01 par value; 900,000,000 shares authorized; 195,164,000 and 217,795,000 shares issued and outstanding.................................. 1,952 2,178 Additional paid-in capital.................................................. 303,989 582,148 Accumulated foreign currency translation.................................... (52,289) (42,580) Retained earnings........................................................... 1,277,092 1,143,214 ----------------- -------------- Total stockholders' equity.................................................. 1,530,744 1,684,960 ----------------- -------------- $ 4,437,419 $ 4,235,659 ----------------- -------------- ----------------- -------------- </TABLE> The accompanying notes are an integral part of these balance sheets. 23
PRICE/COSTCO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> 53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED SEPTEMBER 3, AUGUST 28, AUGUST 29, 1995 1994 1993 -------------- -------------- -------------- <S> <C> <C> <C> REVENUE Net sales...................................................... $ 17,905,926 $ 16,160,911 $ 15,154,685 Membership fees and other...................................... 341,360 319,732 309,129 -------------- -------------- -------------- Total revenue................................................ 18,247,286 16,480,643 15,463,814 OPERATING EXPENSES Merchandise costs.............................................. 16,225,848 14,662,891 13,751,153 Selling, general and administrative............................ 1,555,588 1,425,549 1,314,660 Preopening expenses............................................ 25,018 24,564 28,172 Provision for estimated warehouse closing costs................ 7,500 7,500 5,000 -------------- -------------- -------------- Operating income............................................. 433,332 360,139 364,829 OTHER INCOME (EXPENSE) Interest expense............................................... (67,911) (50,472) (46,116) Interest income and other...................................... 2,783 13,888 17,750 Provision for merger and restructuring expenses................ -- (120,000) -- -------------- -------------- -------------- INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES................................ 368,204 203,555 336,463 Provision for income taxes..................................... 150,963 92,657 133,620 -------------- -------------- -------------- INCOME FROM CONTINUING OPERATIONS................................ 217,241 110,898 202,843 DISCONTINUED OPERATIONS: Income (loss), net of tax...................................... -- (40,766) 20,404 Loss on disposal............................................... (83,363) (182,500) -- -------------- -------------- -------------- NET INCOME (LOSS)................................................ $ 133,878 $ (112,368) $ 223,247 -------------- -------------- -------------- -------------- -------------- -------------- NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE -- PRIMARY: Continuing operations:......................................... $ 1.06 $ 0.51 $ 0.92 -------------- -------------- -------------- -------------- -------------- -------------- FULLY DILUTED: Continuing operations:......................................... $ 1.05 $ 0.51 $ 0.92 Discontinued operations: Income (loss), net of tax.................................... -- (0.19) 0.08 Loss on disposal............................................. (0.37) (0.83) -- -------------- -------------- -------------- Net income (loss).............................................. $ 0.68 $ (0.51) $ 1.00 -------------- -------------- -------------- -------------- -------------- -------------- </TABLE> The accompanying notes are an integral part of these financial statements. 24
PRICE/COSTCO, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE 53 WEEKS ENDED SEPTEMBER 3, 1995 AND THE 52 WEEKS ENDED AUGUST 28, 1994, AND AUGUST 29, 1993 (IN THOUSANDS) <TABLE> <CAPTION> ACCUMULATED COMMON STOCK ADDITIONAL FOREIGN ---------------------- PAID-IN CURRENCY RETAINED SHARES AMOUNT CAPITAL TRANSLATION EARNINGS TOTAL --------- ----------- ----------- ------------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> BALANCE AT AUGUST 30, 1992................. 216,020 $ 2,160 $ 564,362 $ (4,914) $1,032,335 $1,593,943 Stock options exercised including income tax benefits............................ 1,529 15 13,436 -- -- 13,451 Shares repurchased....................... (475) (4) (6,530) -- -- (6,534) Net income............................... -- -- -- -- 223,247 223,247 Foreign currency translation adjustment.............................. -- -- -- (27,379) -- (27,379) --------- ----------- ----------- ------------ ---------- ---------- BALANCE AT AUGUST 29, 1993................. 217,074 2,171 571,268 (32,293) 1,255,582 1,796,728 Stock options exercised including income tax benefits............................ 748 7 11,376 -- -- 11,383 Shares repurchased....................... (27) -- (496) -- -- (496) Net loss................................. -- -- -- -- (112,368) (112,368) Foreign currency translation adjustment.............................. -- -- -- (10,287) -- (10,287) --------- ----------- ----------- ------------ ---------- ---------- BALANCE AT AUGUST 28, 1994................. 217,795 2,178 582,148 (42,580) 1,143,214 1,684,960 Stock options exercised including income tax benefits............................ 593 6 4,071 -- -- 4,077 Shares exchanged......................... (23,224) (232) (282,230) -- -- (282,462) Net income............................... -- -- -- -- 133,878 133,878 Foreign currency translation adjustment.............................. -- -- -- (9,709) -- (9,709) --------- ----------- ----------- ------------ ---------- ---------- BALANCE AT SEPTEMBER 3, 1995............... 195,164 $ 1,952 $ 303,989 $ (52,289) $1,277,092 $1,530,744 --------- ----------- ----------- ------------ ---------- ---------- --------- ----------- ----------- ------------ ---------- ---------- </TABLE> The accompanying notes are an integral part of these financial statements. 25
PRICE/COSTCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> 53 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED SEPTEMBER 3, AUGUST 28, AUGUST 29, 1995 1994 1993 ------------ ----------- ----------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)...................................................... $ 133,878 $ (112,368) $ 223,247 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......................................... 142,022 136,317 106,236 Net (gain) loss on sale of property and equipment and other............ (384) 3,282 3,079 Provision for asset impairments........................................ -- 90,200 -- Loss on disposal of discontinued operations............................ 83,363 182,500 -- Increase (decrease) in deferred income taxes........................... (3,559) (41,623) 10,954 Change in receivables, other current assets, accrued expenses and other current liabilities................................................... (81,729) 64,044 (26,917) Increase in merchandise inventories.................................... (160,114) (271,332) (137,855) Increase in accounts payable........................................... 155,851 205,213 136,142 Other.................................................................. 9,054 (3,013) (5,031) Discontinued operations, net........................................... -- (5,415) (14,047) ------------ ----------- ----------- Total adjustments.................................................... 144,504 360,173 72,561 ------------ ----------- ----------- Net cash provided by operating activities............................ 278,382 247,805 295,808 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment.................................... (530,638) (474,553) (533,025) Proceeds from the sale of property and equipment....................... 7,337 15,960 12,198 Investment in unconsolidated joint ventures............................ (11,487) (39,795) (21,905) Decrease in short-term investments and restricted cash................. 9,268 80,848 31,018 Increase in other assets and other, net................................ (10,932) (8,416) (8,947) Discontinued operations, net........................................... -- (33,721) 70,572 ------------ ----------- ----------- Net cash used in investing activities.................................. (536,452) (459,677) (450,089) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (repayments) under short-term credit facilities............. (73,194) 130,344 22,620 Net proceeds from issuance of long-term debt........................... 299,026 13,805 8,580 Repayments of long-term debt........................................... (3,194) (29,937) (9,805) Changes in bank overdraft.............................................. 5,668 (15,477) (2,757) Proceeds from minority interests....................................... 16,603 36,557 -- Exercise of stock options and warrants, including income tax benefit... 4,077 11,383 13,451 Repurchases of common stock............................................ -- (496) (6,534) ------------ ----------- ----------- Net cash provided by financing activities.............................. 248,986 146,179 25,555 ------------ ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. 1,134 (896) (5,039) ------------ ----------- ----------- Net decrease in cash and cash equivalents.............................. (7,950) (66,589) (133,765) CASH AND CASH EQUIVALENTS BEGINNING OF YEAR.............................. 53,638 120,227 253,992 ------------ ----------- ----------- CASH AND CASH EQUIVALENTS END OF YEAR.................................... $ 45,688 $ 53,638 $ 120,227 ------------ ----------- ----------- ------------ ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized)................................... $ 75,583 $ 50,787 $ 44,944 Income taxes........................................................... $ 165,269 $ 97,685 $ 149,150 </TABLE> The accompanying notes are an integral part of these financial statements. 26
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The 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"). As described more fully in "Note 2 -- Merger of Price and Costco", on October 21, 1993, Price and Costco became wholly-owned subsidiaries of PriceCostco. Price and Costco primarily operate cash and carry membership warehouses. As described more fully in "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations," the Company treated the spin-off of its non-club real estate operations as discontinued operations in the fourth quarter of fiscal 1994. The Company's investment in the Price Club Mexico joint venture and in other unconsolidated joint ventures that are less than majority owned are accounted for under the equity method. FISCAL YEARS The Company reports on a 52/53 week fiscal year basis which ends on the Sunday nearest August 31st. Fiscal year 1995 was 53 weeks and fiscal year 1994 and 1993 were each 52 weeks. CASH AND CASH EQUIVALENTS The Company considers all investments in highly liquid debt instruments maturing within 90 days after purchase as cash equivalents unless amounts are held in escrow for future property purchases or restricted by agreements. SHORT-TERM INVESTMENTS AND RESTRICTED CASH Short-term investments include highly liquid investments in United States and Canadian government obligations, along with other investment vehicles, some of which have maturities of three months or less at the time of purchase. The Company's policy is to classify these investments as short-term investments rather than cash equivalents if they are acquired and disposed of through its investment trading account, held for future property purchases, or restricted by agreement. MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost or market as determined primarily by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for U.S. merchandise inventories. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. If all merchandise inventories had been valued using the first-in, first-out (FIFO) method, inventories would have been higher by $16,150 at September 3, 1995, $6,650 at August 28, 1994, and $9,250 at August 29, 1993. <TABLE> <CAPTION> SEPTEMBER 3, AUGUST 28, 1995 1994 ------------- ------------- <S> <C> <C> Merchandise inventories consist of: United States (primarily LIFO).......................................... $ 1,174,067 $ 1,089,924 Foreign (FIFO).......................................................... 248,205 170,552 ------------- ------------- Total................................................................. $ 1,422,272 $ 1,260,476 ------------- ------------- ------------- ------------- </TABLE> 27
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company provides for estimated inventory losses between physical inventory counts on the basis of a standard percentage of sales. This provision is adjusted periodically to reflect the actual shrinkage results of the physical inventory counts which generally occur in the second and fourth quarters of the Company's fiscal year. When required in the normal course of business, the Company enters into agreements securing vendor interests in inventories. RECEIVABLES Receivables consist primarily of vendor rebates and promotional allowances and other miscellaneous amounts due to the Company, and are net of allowance for doubtful accounts of $4,628 at September 3, 1995 and $3,045 at August 28, 1994. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization expenses are computed using the straight-line method for financial reporting purposes and by accelerated methods for tax purposes. Buildings are depreciated over twenty-five to thirty-five years; equipment and fixtures are depreciated over three to ten years; and land rights and leasehold improvements are amortized over the initial term of the lease. Interest costs incurred on property and equipment during the construction period are capitalized. The amount of interest costs capitalized related to continuing operations was approximately $3,275 in fiscal 1995, $5,209 in fiscal 1994 and $5,423 in fiscal 1993. The amount of capitalized interest relating to the discontinued real estate operations for fiscal 1994 and 1993 was $1,961 and $4,060, respectively. GOODWILL Goodwill, included in other assets, totaled $51,063 at September 3, 1995 and $38,761 at August 28, 1994 and resulted from certain previous business combinations and the purchase of Price Enterprises' interest in Price Club Mexico in March 1995. Goodwill is being amortized over 5 to 40 years using the straight-line method. Accumulated amortization was $7,016 at September 3, 1995 and $5,986 at August 28, 1994. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE The calculation of net income per common and common equivalent share for each period presented prior to the Merger reflects the issuance of 2.13 shares of PriceCostco Common Stock for each share of Price Common Stock used in such calculation and one share of PriceCostco Common Stock for each share of Costco Common Stock used in such calculation. For fiscal 1995 and 1993, this calculation 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. For fiscal 1994, the 6 3/4% and 5 1/2% convertible subordinated debentures were not dilutive for either primary or fully diluted purposes. For all periods presented, the 5 3/4% convertible subordinated debentures were not dilutive for either primary or fully diluted purposes. The weighted average number of common and common equivalent shares outstanding for primary and fully diluted share calculations for fiscal 1995, 1994 and 1993 were as follows (in thousands): <TABLE> <CAPTION> 1995 1994 1993 --------- --------- --------- <S> <C> <C> <C> Primary.............................................................. 210,962 219,332 227,331 Fully diluted........................................................ 224,079 219,334 240,162 </TABLE> 28
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PREOPENING EXPENSES Preopening expenses related to new warehouses, major remodels/expansion, regional offices and other startup operations are expensed as incurred. MEMBERSHIP FEES Membership fee revenue represents annual membership fees paid by substantially all of the Company's members. In accordance with industry practice, annual membership fees are recognized as income when received. FOREIGN CURRENCY TRANSLATION The accumulated foreign currency translation relates to the Company's consolidated foreign operations and its investment in the Price Club Mexico joint venture. It is determined by application of the current rate method and included in the determination of consolidated stockholders' equity at the respective balance sheet dates. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." That standard requires companies to account for deferred income taxes using the asset and liability method. SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES FISCAL 1995 NON-CASH ACTIVITIES - During December 1994, the Company exchanged 23,224,028 shares of Price Enterprises common stock valued at $282,462 for an equal number of shares of Price Costco common stock. - In February 1995, the Company exchanged 3,775,972 shares of Price Enterprises common stock valued at $45,925 for an interest-bearing note receivable from Price Enterprises due in December 1996. - As of August 28, 1994, the net assets of Price Enterprises consisted primarily of the discontinued operations net assets of $377,085 and certain other assets. In connection with the spin-off of Price Enterprises, all of these assets were eliminated from the consolidated balance sheet during fiscal 1995. For additional information see "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations." - In April 1995, the Company purchased Price Enterprises' 25.5% interest in Price Club Mexico for $30,500 by a partial offset to the $45,925 note receivable due from Price Enterprises. - During fiscal 1995, the company increased its investment in certain unconsolidated joint ventures by $23,100 through reductions of accounts receivable due from those joint ventures. FISCAL 1994 NON-CASH ACTIVITIES - During fiscal 1994, the Company transferred approximately $127,055 of property and equipment and other assets to its discontinued non-club real estate operations. FISCAL 1993 NON-CASH ACTIVITIES - During fiscal 1993, the Company transferred approximately $72,093 of property and equipment and other assets to its discontinued non-club real estate operations. 29
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DERIVATIVES The Company has limited involvement with derivative financial instruments and only uses them to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases. The amount of interest rate and foreign exchange contracts outstanding at year-end or in place during fiscal 1995 was immaterial to the Company's results of operations or its financial position. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement No. 121 ("SFAS No. 121") on accounting for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to assets to be held and used. SFAS No. 121 also establishes accounting standards for long-lived assets and certain identifiable intangibles to be disposed of. The Company is required to adopt SFAS No. 121 no later than fiscal 1996. The Company has not yet determined when SFAS No. 121 will be adopted or what the impact of adoption will be on the carrying value of its long-lived and related intangible assets. In November 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which established financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 specifies a fair value based method of accounting for stock-based compensation plans and encourages (but does not require) entities to adopt that method in place of the provisions of APB Opinion 25, "Accounting for Stock Issued to Employees". The Company has not yet determined which method of accounting will be used or what impact the adoption of the accounting requirements of SFAS No. 123 might have on the Company's results of operations. RECLASSIFICATIONS Certain reclassifications have been reflected in the financial statements in order to conform prior years to the current year presentation. NOTE 2 -- MERGER OF PRICE AND COSTCO On October 21, 1993, the shareholders of both Price and Costco approved the mergers of Price and Costco into PriceCostco (the "Merger"). PriceCostco was formed to effect the Merger which qualified as a "pooling-of-interests" for accounting and financial reporting purposes. The pooling-of-interests method of accounting is intended to present as a single interest two or more common shareholder interests which were previously independent. Consequently, the historical financial statements for periods prior to the Merger were restated as though the companies had been combined. The restated financial statements were adjusted to conform the accounting policies of the separate companies. All fees and expenses related to the Merger and to the consolidation and restructuring of the combined companies were expensed as required under the pooling-of-interests accounting method. In the first quarter of fiscal 1994, the Company recorded a provision for merger and restructuring costs of $120,000 pre-tax ($80,000 after tax) related to the Merger. 30
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 2 -- MERGER OF PRICE AND COSTCO (CONTINUED) Components of the $120,000 provision for merger and restructuring expenses are as follows: <TABLE> <CAPTION> AMOUNTS EXPENDED ------------------------------------- FISCAL 1994 FISCAL 1995 TOTAL ----------- ----------- ----------- <S> <C> <C> <C> Direct transaction expenses including investment banking, legal, accounting, printing, filing and other professional fees........ $ 24,548 $ -- $ 24,548 Cost of closing eight operating warehouses including property write-downs, severance, future lease costs, and other closing expenses; write-downs of abandoned warehouse projects and restructuring of redundant international expansion efforts...... 24,948 -- 24,948 Costs of consolidating central administrative functions including information systems, accounting, merchandising and human resources and costs associated with restructuring regional and warehouse support activities including merchandise re-alignment and distribution................................................ 30,178 9,300 39,478 Costs of converting management information systems, primarily merchandising, operating, membership, payroll, and sales audit........................................................... 13,904 3,969 17,873 Other expenses................................................... 9,224 3,929 13,153 ----------- ----------- ----------- Total........................................................ $ 102,802 $ 17,198 $ 120,000 ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS On July 28, 1994, PriceCostco entered into an Agreement of Transfer and Plan of Exchange (as amended and restated, the "Transfer and Exchange Agreement") with Price Enterprises, Inc. ("Price Enterprises"). Price Enterprises was an indirect, wholly-owned subsidiary of PriceCostco, formed in July 1994. The transactions contemplated by the Transfer and Exchange Agreement are referred to herein as the "Exchange Transaction." Pursuant to the Transfer and Exchange Agreement, PriceCostco offered to exchange one share of Price Enterprises Common Stock for each share of PriceCostco Common Stock, up to a maximum of 27 million shares of Price Enterprises Common Stock (the "Exchange Offer"). In the fourth quarter of fiscal 1994, the Company recorded an estimated loss on disposal of its discontinued operations (the non-club real estate segment) of $182,500 as a result of entering into the Transfer and Exchange Agreement. The loss also included the direct expenses related to the Exchange Transaction. For purposes of recording such estimated loss, the Company assumed that (i) the Exchange Offer would be fully subscribed, (ii) a per share price of Price Enterprises Common Stock of $15.25 (the closing sales price of PriceCostco Common Stock on October 24, 1994), and (iii) direct expenses and other costs related to the Exchange Transaction of approximately $15,250. The Exchange Transaction was completed on December 20, 1994, with 23,224,028 shares of PriceCostco Common Stock tendered and exchanged for an equal number of shares of Price Enterprises Common Stock. On February 9, 1995 Price Enterprises purchased from PriceCostco 3,775,972 31
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) shares of Price Enterprises Common Stock, constituting all of the remaining shares of Price Enterprises Common Stock held by PriceCostco. Price Enterprises issued to PriceCostco a secured promissory note in the amount of $45,925 due in December 1996 as payment for such shares, based on an average closing sales price $12.1625 of Price Enterprises Common Stock. The price per share of Price Enterprises Common Stock represented the average closing sales price of Price Enterprises Common Stock during the 20 trading days commencing on the sixth trading day following the closing of the Exchange Offer. Based on the aggregate number of shares of Price Enterprises Common Stock (27 million shares) exchanged for PriceCostco Common Stock and sold to Price Enterprises for a secured promissory note and an average closing sales price of $12.1625 per share for Price Enterprises Common Stock, the loss on disposal of the discontinued real estate operations increased by $83,363 (27 million shares multiplied by $3.0875 per share representing the difference between the estimated and actual price per share). This non-cash charge was reflected as an additional loss on disposal of discontinued operations in the second quarter ended May 7, 1995. The following real estate related assets were transferred to Price Enterprises: - Substantially all of the real estate properties which historically formed the non-club real estate segment of PriceCostco. - Four Price Club warehouses ("Warehouse Properties") which were adjacent to existing non-club real estate properties, which are now being leased back to PriceCostco, effective August 29, 1994, at initial collective annual rentals of approximately $8,600. - Notes receivable from various municipalities and agencies ("City Notes"). - Note receivable in the principal amount of $41,000 made by Atlas Hotels, Inc., secured by a hotel and convention center property located in San Diego, California ("Atlas Note"). In addition, PriceCostco transferred to Price Enterprises 51% of the outstanding capital stock of Price Quest, Inc. ("Price Quest") and Price Global Trading, Inc. ("Price Global"). Price Quest operates the Quest interactive electronic shopping business and provides other services to members. Price Global has the rights to develop membership warehouse club businesses in certain geographical areas specified in the Transfer and Exchange Agreement. PriceCostco also transferred to Price Enterprises a 25.5% interest in the Price Club Mexico joint venture. This interest was subsequently acquired from Price Enterprises in fiscal 1995. Price Club Mexico is a joint venture with Controladora Comercial Mexicana, S.A. de CV. operating Price Clubs in Mexico. See "Note 4 -- Acquisition of Price Enterprises' Interest in Price Club Mexico." PriceCostco and Price Enterprises entered into an unsecured revolving credit agreement under which PriceCostco agreed to advance Price Enterprises up to a maximum principal amount of $85,000. All amounts have been paid under this agreement and PriceCostco no longer has any obligations to provide financing for Price Enterprises. DISCONTINUED OPERATIONS Historically, the Company treated non-club real estate investments as a separate reportable business segment. The primary assets generating operating income for the segment were non-club real estate properties, consisting of property owned directly and property owned by real estate joint 32
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) venture partnerships in which the Company had a controlling interest. Real estate joint ventures related to real estate partnerships that were less than majority owned. In fiscal 1994, the Atlas Note was purchased and the related interest income was included in the non-club real estate segment. Additionally, the Warehouse Properties and City Notes transferred to Price Enterprises as of August 28, 1994 were included in the net assets of the discontinued operations as of August 28, 1994, in the accompanying consolidated balance sheet. However, the operating expenses of the Warehouse Properties and the interest income on the City Notes have not been included in the real estate segment operating results because historically these amounts have been included as part of merchandising operations and other income. The operating results and net assets of the Price Quest, Price Global and the 25.5% interest in the Price Club Mexico joint venture transferred to Price Enterprises are included in continuing operations because they were not related to the discontinued real estate operations. DISCONTINUED OPERATIONS -- NET ASSETS Net assets related to discontinued real estate operations as shown on the consolidated balance sheet at August 28, 1994 consisted of the following: <TABLE> <CAPTION> 1994 ------------ <S> <C> Non-Club Real Estate properties, net of accumulated depreciation.......................... $ 351,958 Warehouse Properties, net of accumulated depreciation..................................... 91,415 City and Atlas Notes...................................................................... 73,023 Other assets.............................................................................. 8,672 Deferred tax assets....................................................................... 23,282 Liabilities............................................................................... (4,015) ------------ 544,335 Less: Reserve for estimated loss on disposal.............................................. (167,250) ------------ Discontinued operations -- net assets..................................................... $ 377,085 ------------ ------------ </TABLE> INCOME (LOSS) FROM DISCONTINUED OPERATIONS Components of net income (loss) from discontinued operations for fiscal 1994 and 1993, prior to the effective date of the Exchange Transaction, were as follows: <TABLE> <CAPTION> 1994 1993 ---------- ---------- <S> <C> <C> Real estate rentals............................................................ $ 29,753 $ 22,802 Operating expenses............................................................. (17,158) (10,457) Gains on sale of non-club real estate properties............................... 6,135 21,500 Provision for asset impairments (including a change in estimate related to the Exchange Transaction)......................................................... (90,200) -- ---------- ---------- Operating income (loss).................................................... (71,470) 33,845 Interest income................................................................ 2,319 -- Provision (benefit) for income taxes........................................... (28,385) 13,441 ---------- ---------- Net income (loss).......................................................... $ (40,766) $ 20,404 ---------- ---------- ---------- ---------- </TABLE> PROVISION FOR ASSET IMPAIRMENTS The loss on discontinued real estate operations includes a provision of $90,200 of which $80,500 ($47,500 after tax) relates to a change in calculating estimated losses for assets which are economically 33
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) impaired. This change in accounting estimates results from the spin-off of the real estate segment assets into Price Enterprises and Price Enterprises' decision to pursue business plans and operating strategies as a stand-alone entity which are significantly different than the previous strategies of the Company. Price Enterprises' management believes that as a separate operating business it will not have the same access to capital as the Company or generate internal funds from operations to the same extent as the Company. PriceCostco's accounting policies with respect to estimating the amount of impairments on individual real estate properties and related assets were such that impairment losses would be recorded if the carrying amount of the asset could not be recovered from estimated future cash flows on an undiscounted basis. Price Enterprises' management believed that in view of its strategies with respect to the number and nature of properties that would be selected for disposition, it would be more appropriate to estimate impairment losses based on fair values of the real estate properties as determined by appraisals and/or a risk-adjusted discounted cash flow approach. In determining impairment losses, individual real estate assets were reduced to estimated fair value, if lower than historical cost. For those assets which have an estimated fair value in excess of cost, the asset continues to be recorded at cost. The impairment losses recorded as a result of this change in accounting estimates reduced the book basis of certain of the real estate and related assets. Under the previous policy, PriceCostco and Price Enterprises had determined that a provision for asset impairments of approximately $9,700 was required relating to four properties which were under contract or in final negotiations for sale. GAINS ON SALE OF NON-CLUB REAL ESTATE PROPERTIES During fiscal 1994, the Company entered into a transaction with The Price REIT, Inc. On October 1, 1993, the Company sold a single shopping center and adjacent Price Club (which is being leased back to the Company) for $28,200. The Company recorded a $4,210 pre-tax gain in connection with this sale. During fiscal 1993, the Company entered into two transactions with The Price REIT: (a) On December 18, 1992, the Company sold a former Price Club property for $14,350. The Company recorded a pre-tax gain of $6,710 in connection with this sale. (b) On August 12, 1993, the Company sold three shopping centers and adjacent Price Clubs (which are being leased back to the Company) and its 49.6% interest in a joint venture which owns five shopping centers, for which the Company received proceeds of approximately $117,000 and recognized a $14,320 pre-tax gain. RELATED PARTY TRANSACTIONS Joseph Kornwasser, a former director of PriceCostco until July 28, 1994, is a general partner and has a two-thirds ownership interest in Kornwasser and Friedman Shopping Center Properties (K & F). K & F was a partner with Price in two partnerships. As of August 28, 1994, Price's total capital contributions to the partnerships were $83,000. Aggregate cumulative distributions from these partnerships were $14,300 at August 28, 1994. Price had also entered into a Development Agreement with K & F for the development of four additional properties. As of August 28, 1994, Price's total capital expenditures for these properties were $58,000. Aggregate cumulative distributions from these properties were $4,500 at August 28, 1994. Both partnership agreements and the Development Agreement provided for a preferred return to Price on a varying scale from 9% to 10% on its invested capital after which operating cash flows or profits are distributed 75% to Price and 25% to 34
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) K & F. On August 12, 1993, Mr. Kornwasser became Chief Executive Officer and director of The Price REIT. On that date, The Price REIT also obtained the right to acquire certain of the partnership interest of K & F described above. On August 28, 1994, the Company purchased both K & F's interest in the two partnerships and its rights under the Development Agreement for a total of $2,500. NOTE 4 -- ACQUISITION OF PRICE ENTERPRISES' INTEREST IN PRICE CLUB MEXICO In April 1995, the Company purchased Price Enterprises' 25.5% interest in Price Club Mexico for $30,500. The purchase price was paid by a partial offset of the $45,925 secured promissory note owed to PriceCostco by Price Enterprises (see "Note 1 -- Summary of Significant Accounting Policies"). As a result of the purchase, the Company owns a 50% interest in the Price Club Mexico joint venture. Controladora Comercial Mexicana owns the other 50% interest in the Price Club Mexico joint venture. In January 1995, PriceCostco assumed management responsibility over operations, merchandising and site acquisitions for Price Club Mexico. NOTE 5 -- DEBT SHORT-TERM BORROWINGS The company has a domestic multiple option loan facility with a group of 13 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 30, 1996, and $250,000 expires on January 30, 1998. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At September 3, 1995, no amounts were outstanding under the loan facility and $51,965 was outstanding under the Company's 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 30, 1996, at substantially the same terms. The weighted average borrowings, highest borrowings and interest rate under all short-term borrowing arrangements were as follows for fiscal 1995, 1994 and 1993: <TABLE> <CAPTION> MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE CATEGORY OF AGGREGATE OUTSTANDING DURING OUTSTANDING DURING INTEREST RATE DURING SHORT-TERM BORROWINGS THE PERIOD THE PERIOD THE PERIOD - ---------------------------------------------------- ------------------ ------------------ --------------------- <S> <C> <C> <C> Period ended September 3, 1995 Bank borrowings: U.S............................................. $ -- $ -- -- Canadian........................................ 9,374 1,776 8.04 Commercial Paper: U.S............................................. 468,000 215,683 5.75 Canadian........................................ 23,760 3,912 5.56 Period ended August 28, 1994 Bank borrowings: U.S............................................. $ 142,000 $ 16,786 3.46% Canadian........................................ 25,369 8,072 6.47 Commercial Paper.................................. 149,340 35,655 3.92 Period ended August 29, 1993 Bank borrowings: U.S............................................. $ 55,000 $ 15,455 3.56% Canadian........................................ 12,358 3,295 6.05 Commercial Paper.................................. 55,000 16,119 3.29 </TABLE> 35
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5 -- DEBT (CONTINUED) In addition, the Company's wholly-owned Canadian subsidiary has a $103,000 commercial paper program supported by a bank credit facility with three Canadian banks of which $63,000 will expire in April 1996 and $40,000 will expire in April 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At September 3, 1995, no amounts were outstanding under the bank credit facility and $23,760 was outstanding under the Canadian commercial paper program. The Company has separate letter of credit facilities (for commercial and standby letters of credit) totaling approximately $196,000. The outstanding commitments under these facilities at September 3, 1995 totaled approximately $127,000, including approximately $51,000 in standby letters for workers' compensation requirements. LONG-TERM DEBT Long-term debt at September 3, 1995 and August 28, 1994 consists of: <TABLE> <CAPTION> 1995 1994 ------------- ----------- <S> <C> <C> 5 3/4% Convertible subordinated debentures due May 2002..................... $ 300,000 $ 300,000 6 3/4% Convertible subordinated debentures due March 2001................... 285,079 285,079 5 1/2% Convertible subordinated debentures due February 2012................ 179,338 179,338 7 1/8% Senior Notes due June 2005........................................... 300,000 -- Notes payable secured by trust deeds on real estate......................... 27,377 31,235 Banker's Acceptances and other.............................................. 8,021 6,266 ------------- ----------- 1,099,815 801,918 Less current portion (included in other current liabilities)................ 5,200 6,426 ------------- ----------- Total long-term debt...................................................... $ 1,094,615 $ 795,492 ------------- ----------- ------------- ----------- </TABLE> Effective upon consummation of the Merger, PriceCostco became a co-obligor under each of the convertible subordinated debentures originally issued by Price and Costco. These debentures are convertible into shares of PriceCostco. Conversion rates of Price subordinated debentures have been adjusted for the exchange ratio pursuant to the Merger. The 5 3/4% convertible subordinated debentures due May 2002 are convertible at any time prior to maturity, unless previously redeemed, into shares of PriceCostco common stock at a conversion price of $41.25 per share, subject to adjustment in certain events. Interest on the debentures is payable semiannually on November 15 and May 15. Commencing on June 1, 1995, these debentures are redeemable at the option of the Company, in whole or in part, at certain redemption prices. The 6 3/4% convertible subordinated debentures are convertible into shares of PriceCostco common stock at any time on or before March 2001, unless previously redeemed, at a conversion price of $22.54 per share, subject to adjustment in certain events. Interest on the debentures is payable semiannually on March 1 and September 1. The debentures are redeemable at the option of the Company after March 1, 1994 at certain redemption prices. During fiscal 1994 in connection with the Merger, approximately $2,421 of these debentures were purchased at their face value. The 5 1/2% convertible subordinated debentures are convertible into shares of PriceCostco common stock at a conversion price of $23.77 per share, subject to adjustment in certain events. The debentures provide for payments to an annual sinking fund in the amount of 5% of the original principal amount ($10,000), commencing February 1998, calculated to retire 70% of the principal 36
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5 -- DEBT (CONTINUED) amount prior to maturity. During fiscal 1990, the Company repurchased debentures with a face value of $20,597 and will apply this purchase to the initial sinking fund payments. Interest is payable semiannually on February 28 and August 31. The 7 1/8% Senior Notes were issued on June 7, 1995. Interest on the notes is payable semiannually on June 15 and December 15. The indentures contain limitations on the Company's and certain subsidiaries' ability to create liens securing indebtedness and to enter into certain sale leaseback transactions. At September 3, 1995, the fair values of the 5 3/4%, 6 3/4% and 5 1/2% convertible subordinated debentures, based on current market quotes, were approximately $276,000, $291,000, and $173,000 respectively. Early retirement of these debentures would result in the Company paying a call premium. The fair value of the 7 1/8% Senior Notes, based on market quotes on September 3, 1995, were approximately $302,000. The Senior Notes are not redeemable prior to maturity. Maturities of long-term debt during the next five fiscal years and thereafter are as follows: <TABLE> <S> <C> 1996........................................................... $ 5,200 1997........................................................... 6,768 1998........................................................... 2,469 1999........................................................... 1,753 2000........................................................... 1,931 Thereafter..................................................... 1,081,694 ---------- Total...................................................... $1,099,815 ---------- ---------- </TABLE> NOTE 6 -- LEASES The Company leases land and/or warehouse buildings at 49 warehouses open at September 3, 1995 and certain other office and distribution facilities under operating leases with remaining terms ranging from 2 to 30 years. These leases generally contain one or more of the following options which the Company can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then fair market rental rate; (b) purchase of the property at the then fair market value; (c) right of first refusal in the event of a third party purchase offer. Certain leases provide for periodic rental increases based on the price indices and some of the leases provide for rents based on the greater of minimum guaranteed amounts or sales volume. Contingent rents have not been material. Additionally, the Company leases certain equipment and fixtures under short-term operating leases which permit the Company to either renew for a series of one-year terms or to purchase the equipment at the then fair market value. Aggregate rental expense for fiscal 1995, 1994 and 1993 was $53,600, $44,900, and $38,700, respectively. Future minimum payments during the next five fiscal years and thereafter under noncancelable leases with terms in excess of one year, at September 3, 1995, were as follows: <TABLE> <S> <C> 1996............................................................. $ 53,849 1997............................................................. 52,906 1998............................................................. 48,957 1999............................................................. 46,617 2000............................................................. 46,107 Thereafter....................................................... 537,958 --------- Total minimum payments....................................... $ 786,394 --------- --------- </TABLE> 37
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7 -- STOCK OPTIONS AND WARRANTS Prior to the Merger, Price and Costco adopted various incentive and non-qualified stock option plans which allowed certain key employees and directors to purchase or be granted common stock of Price and Costco (collectively the Old Stock Option Plans). Options were granted for a maximum term of ten years, and were exercisable upon vesting. Options granted under these plans generally vest ratably over five to nine years. Subsequent to the Merger, new grants of options are not being made under the Old Stock Option Plans. Stock option transactions relating to the Old Stock Option Plans are summarized below: <TABLE> <CAPTION> STOCK OPTIONS (IN RANGE OF EXERCISE THOUSANDS) PRICE PER SHARE ------------- ----------------- <S> <C> <C> Under option at August 29, 1993...................................... 12,904 $ .17 - 40.17 Granted............................................................ 68 18.00 Exercised.......................................................... (748) 1.46 - 19.00 Cancelled.......................................................... (507) 5.67 - 40.17 ------------- Under option at August 28, 1994...................................... 11,717 .17 - 40.17 Granted............................................................ 0 -- Exercised.......................................................... (578) .17 - 17.49 Cancelled.......................................................... (1,230) 11.33 - 40.16 ------------- Under option at September 3, 1995.................................... 9,909 2.75 - 40.17 ------------- ------------- Options exercisable at September 3, 1995............................. 7,046 ------------- ------------- </TABLE> The PriceCostco 1993 Combined Stock Grant and Stock Option Plan (the New Stock Option Plan) provides for the issuance of up to 10 million shares of the Company's common stock pursuant to the exercise of stock options or up to 1,666,666 through stock grants. Stock option and grant transactions relating to the New Stock Option Plan are summarized below: <TABLE> <CAPTION> STOCK OPTIONS RANGE OF EXERCISE (IN THOUSANDS) PRICE PER SHARE --------------- ----------------- <S> <C> <C> Under option at August 29, 1993...................................... -- $ -- Granted............................................................ 3,252 14.00 - 19.00 Exercised.......................................................... -- -- Cancelled.......................................................... (278) 14.00 - 19.00 ----- Under option at August 28, 1994...................................... 2,974 14.00 - 19.00 Granted............................................................ 3,516 12.50 - 19.00 Exercised.......................................................... (17) 13.31 - 15.13 Cancelled.......................................................... (419) 12.50 - 19.00 ----- Under option at September 3, 1995.................................... 6,054 12.50 - 19.00 ----- ----- Options exercisable at September 3, 1995............................. 958 ----- ----- </TABLE> A foreign subsidiary of the Company has a separate stock option plan whereby employees of the subsidiary receive stock option grants of subsidiary stock. At September 3, 1995, stock option grants were approximately 1% of the subsidiary's outstanding shares. In 1986 and 1987, Price granted warrants to purchase a total of 1,065,000 shares of common stock at $17.37 per share to a joint venture partner. The warrants granted in 1987 vested over a five year 38
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7 -- STOCK OPTIONS AND WARRANTS (CONTINUED) period from the date of issuance and were exercisable up to eight years and one month from the grant date. A total of 532,500 warrants have been exercised. The remaining 532,500 warrants were cancelled during fiscal 1995. NOTE 8 -- RETIREMENT PLANS On January 1, 1995, the Company amended and restated The Price Company Retirement Plan, The Price Company 401(k) Plan and the Costco Wholesale 401(k) Plan into the PriceCostco 401(k) Retirement Plan. This new plan is available to all U.S. employees who have one year or more of service except California union employees. The plan allows pre-tax deferral against which the Company matches 50% of eligible employee contributions up to a maximum Company contribution per employee per year. In addition, the Company will provide each participant a contribution based on salary and years of service. The Company has a defined contribution plan for Canadian Price, Canadian Costco and United Kingdom Costco employees and contributes a percentage of each employee's salary. California union employees participate in a defined contribution plan sponsored by its union. The Company makes contributions based upon its union agreement. In June 1995, the Company also established a 401(k) plan for the California union employees. The Company matches 25% of eligible employee contributions up to a maximum Company contribution per employee per year. Amounts expensed under these plans were $37,298, $27,859, and $26,609 for fiscal 1995, 1994 and 1993, respectively. The Company has defined contribution 401(k) and retirement plans only and thus has no liability for postretirement benefit obligations under the Financial Accounting Standards Board Statement No. 106 "Employer's Accounting for Postretirement Benefits Other than Pensions." NOTE 9 -- INCOME TAXES The provisions for income taxes from continuing operations for fiscal 1995, 1994, and 1993 are as follows: <TABLE> <CAPTION> 1995 1994 1993 ----------- --------- ----------- <S> <C> <C> <C> Federal: Current............................................... $ 102,481 $ 64,721 $ 87,933 Deferred.............................................. (4,445) (5,920) 6,924 ----------- --------- ----------- Total federal....................................... 98,036 58,801 94,857 State: Current............................................... 23,009 15,402 20,149 Deferred.............................................. 51 (963) 2,321 ----------- --------- ----------- Total state......................................... 23,060 14,439 22,470 Foreign: Current............................................... 29,051 18,211 14,639 Deferred.............................................. 816 1,206 1,654 ----------- --------- ----------- Total foreign....................................... 29,867 19,417 16,293 ----------- --------- ----------- Total provision for income taxes...................... $ 150,963 $ 92,657 $ 133,620 ----------- --------- ----------- ----------- --------- ----------- </TABLE> 39
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9 -- INCOME TAXES (CONTINUED) A reconciliation between the statutory tax rate and the effective rate from continuing operations for fiscal 1995, 1994 and 1993 is as follows: <TABLE> <CAPTION> 1995 1994 1993 ------------------------ ---------------------- ------------------------ <S> <C> <C> <C> <C> <C> <C> Federal taxes at statutory rate............... $ 128,871 35.0% $ 71,244 35.0% $ 116,652 34.7% State taxes, net.............................. 15,465 4.2 8,753 4.3 15,141 4.5 Foreign taxes, net............................ 4,471 1.2 1,074 0.5 1,878 0.6 Increase in deferred income taxes due to statutory rate change........................ -- -- -- -- 600 0.2 Other......................................... 2,156 0.6 2,386 1.2 (651) (.3) Tax effect of merger-related expenses......... -- -- 9,200 4.5 -- -- ----------- --- --------- --- ----------- --- Provision at effective tax rate............... $ 150,963 41.0% $ 92,657 45.5% $ 133,620 39.7% ----------- --- --------- --- ----------- --- ----------- --- --------- --- ----------- --- </TABLE> The components of the deferred tax assets and liabilities related to continuing operations are as follows: <TABLE> <CAPTION> SEPTEMBER 3, AUGUST 28, 1995 1994 ------------- ----------- <S> <C> <C> Accrued liabilities................................................ $ 71,109 $ 75,697 Other.............................................................. 7,113 6,145 ------------- ----------- Total deferred tax assets...................................... 78,222 81,842 Property and equipment............................................. 65,350 66,118 Merchandise inventories............................................ 17,903 21,199 Other.............................................................. 2,353 5,487 ------------- ----------- Total deferred tax liabilities................................. 85,606 92,804 ------------- ----------- Net deferred tax (assets) liabilities.......................... $ 7,384 $ 10,962 ------------- ----------- ------------- ----------- </TABLE> The net deferred tax (assets) liabilities at September 3, 1995 and August 28, 1994 include current deferred income tax assets of $56,909 and $54,717, respectively, and non-current deferred income tax liabilities of $64,293 and $65,679, respectively. NOTE 10 -- COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS On April 6, 1992, Price was served with a Complaint in an action entitled FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United States District Court, Southern District of California (the "Court"). Subsequently, on April 22, 1992, Price was served with a First Amended Complaint in the action. The case was dismissed without prejudice by the Court on September 21, 1992, on the grounds the plaintiffs had failed to state a sufficient claim against defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in the opinion of 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 40
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 10 -- COMMITMENTS AND CONTINGENCIES (CONTINUED) 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, plaintiff's counsel filed a Second Amended And Consolidated Class Action And Derivative Complaint. The Second Amended Complaint alleges violation of certain state and federal laws arising from the spin-off and Exchange Transaction and the merger between Price and Costco. The Company believes that this suit 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. The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. NOTE 11 -- GEOGRAPHIC INFORMATION The following table indicates the relative amounts of total revenue, operating income and identifiable assets for the Company during fiscal 1995, 1994 and 1993: <TABLE> <CAPTION> 1995 1994 1993 -------------- -------------- -------------- <S> <C> <C> <C> Total revenue: United States.................................................. $ 14,967,611 $ 13,770,316 $ 13,167,175 Foreign........................................................ 3,279,675 2,710,327 2,296,639 -------------- -------------- -------------- $ 18,247,286 $ 16,480,643 $ 15,463,814 -------------- -------------- -------------- -------------- -------------- -------------- Operating income: United States.................................................. $ 357,463 $ 298,303 $ 321,084 Foreign........................................................ 75,869 61,836 43,745 -------------- -------------- -------------- $ 433,332 $ 360,139 $ 364,829 -------------- -------------- -------------- -------------- -------------- -------------- <CAPTION> SEPTEMBER 3, AUGUST 28, 1995 1994 -------------- -------------- <S> <C> <C> <C> Identifiable assets: United States.................................................. $ 3,508,325 $ 3,221,210 Foreign........................................................ 929,094 637,364 Discontinued operations -- net assets (all United States)........................................... -- 377,085 -------------- -------------- $ 4,437,419 $ 4,235,659 -------------- -------------- -------------- -------------- </TABLE> 41
PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED) The tables that follow on the next two pages reflect the unaudited quarterly results of operations for fiscal 1995 and 1994. Shares used in the earnings per share calaculation fluctuate by quarter depending primarily upon whether convertible subordinated debentures are dilutive during the respective period. 42
PRICECOSTCO, INC. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) <TABLE> <CAPTION> 53 WEEKS ENDED SEPTEMBER 3, 1995 -------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL 12 WEEKS 12 WEEKS 12 WEEKS 17 WEEKS 53 WEEKS ------------ -------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> <C> REVENUE Net sales........................ $3,943,718 $ 4,230,160 $ 3,824,841 $ 5,907,207 $ 17,905,926 Membership fees and other........ 86,205 77,162 71,397 106,596 341,360 ------------ -------------- ------------- -------------- ------------- Total revenue.................. 4,029,923 4,307,322 3,896,238 6,013,803 18,247,286 OPERATING EXPENSES Merchandise costs................ 3,577,444 3,821,794 3,476,324 5,350,286 16,225,848 Selling, general and administrative expenses......... 350,178 358,431 345,246 501,733 1,555,588 Preopening expenses.............. 6,991 3,451 3,332 11,244 25,018 Provision for estimated warehouse closing costs................... -- -- -- 7,500 7,500 ------------ -------------- ------------- -------------- ------------- Operating income............... 95,310 123,646 71,336 143,040 433,332 OTHER INCOME (EXPENSE) Interest expense................. (14,139) (13,480) (16,747) (23,545) (67,911) Interest income and other........ 1,079 298 1,068 338 2,783 ------------ -------------- ------------- -------------- ------------- INCOME (LOSS) FROM CONTINUTING OPERATIONS BEFORE PROVISION FOR INCOME TAXES...................... 82,250 110,464 55,657 119,833 368,204 Provision for income taxes....... 33,723 45,693 23,042 48,505 150,963 ------------ -------------- ------------- -------------- ------------- INCOME FROM CONTINUING OPERATIONS........................ 48,527 64,771 32,615 71,328 217,241 DISCONTINUED OPERATIONS: Income (loss), net of tax........ -- -- -- -- -- Loss on disposal................. -- (83,363) -- -- (83,363) ------------ -------------- ------------- -------------- ------------- NET INCOME (LOSS)................ $ 48,527 $ (18,592) $ 32,615 $ 71,328 $ 133,878 ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- FULLY DILUTED: Continuing operations............ $ 0.22 $ 0.31 $ 0.17 $ 0.35 $ 1.05 Discontinued operations: Income (loss), net of tax...... -- -- -- -- -- Loss on disposal............... -- (0.37) -- -- (0.37) ------------ -------------- ------------- -------------- ------------- Net Income (loss)................ $ 0.22 $ (0.06) $ 0.17 $ 0.35 $ 0.68 ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- Shares used in calculation....... 239,757 224,685 196,078 217,203 224,079 ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- </TABLE> 43
PRICECOSTCO, INC. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> 52 WEEKS ENDED AUGUST 28, 1994 -------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL 12 WEEKS 12 WEEKS 12 WEEKS 16 WEEKS 52 WEEKS ------------ -------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> <C> REVENUE Net sales........................ $3,599,797 $ 4,019,417 $ 3,546,445 $ 4,995,252 $ 16,160,911 Membership fees and other........ 81,330 78,245 69,367 90,790 319,732 ------------ -------------- ------------- -------------- ------------- Total revenue.................. 3,681,127 4,097,662 3,615,812 5,086,042 16,480,643 OPERATING EXPENSES Merchandise costs................ 3,272,170 3,640,174 3,226,011 4,524,536 14,662,891 Selling, general and administrative expenses......... 316,559 342,279 328,314 438,397 1,425,549 Preopening expenses.............. 11,130 4,915 1,967 6,552 24,564 Provision for estimated warehouse closing costs................... -- -- -- 7,500 7,500 ------------ -------------- ------------- -------------- ------------- Operating income............... 81,268 110,294 59,520 109,057 360,139 OTHER INCOME (EXPENSE) Interest expense................. (10,823) (11,655) (12,155) (15,839) (50,472) Interest income and other........ 2,522 2,573 2,542 6,251 13,888 Provisions for merger and restructuring expenses.......... (120,000) -- -- -- (120,000) ------------ -------------- ------------- -------------- ------------- INCOME (LOSS) FROM CONTINUTING OPERATIONS BEFORE PROVISION FOR INCOME TAXES...................... (47,033) 101,212 49,907 99,469 203,555 Provision (benefit) for income taxes........................... (10,095) 41,503 20,467 40,782 92,657 ------------ -------------- ------------- -------------- ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS........................ (36,938) 59,709 29,440 58,687 110,898 DISCONTINUED OPERATIONS: Income (loss), net of tax........ 3,947 2,566 2,600 (49,879) (40,766) Loss on disposal................. -- -- -- (182,500) (182,500) ------------ -------------- ------------- -------------- ------------- NET INCOME (LOSS).................. $ (32,991) $ 62,275 $ 32,040 $ (173,692) $ (112,368) ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- FULLY DILUTED Continued operations............. $ (0.17) $ 0.27 $ 0.14 $ 0.27 $ 0.51 Disctonintued operations: Income (loss), net of tax...... 0.02 0.01 0.01 (0.23) (0.19) Loss on disposal............... -- -- -- (0.83) (0.83) ------------ -------------- ------------- -------------- ------------- Net Income (loss)................ $ (0.15) $ 0.28 $ 0.15 $ (0.79) $ (0.51) ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- Shares used in calculation....... 217,191 240,011 219,516 219,279 219,334 ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- </TABLE> 44
EXHIBIT INDEX The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Where an exhibit is incorporated by reference, the number which follows the description of the exhibit indicates the document to which cross reference is made. See the end of this exhibit index for a listing of cross reference documents. <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION - ----------------- ---------------------------------------------------------------------------------------------------- <C> <S> 2(a) Amended and Restated Agreement of Transfer and Plan of Exchange dated as of November 14, 1994 by and between Price/Costco, Inc. and Price Enterprises, Inc. (14) 3(a) Restated Certificate of Incorporation of Price/Costco, Inc. (4) 3(b) Bylaws of Price/Costco, Inc. (9) 3(c) Form of Amended and Restated Bylaws of Price/Costco, Inc. to become effective as specified in the Amended and Restated Agreement of Transfer and Plan of Exchange (see Exhibit 2(a) above). (10) 4(a)(1) 5 1/2% Convertible Subordinated Debenture. (1) 4(a)(2) Indenture by and between Price and First Interstate Bank of California, as Trustee, with respect to the 5 1/2% Convertible Subordinated Debentures. (1) 4(a)(3) Supplemental Indenture dated as of October 21, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 5 1/2% Convertible Subordinated Debentures. (7) 4(a)(4) Supplemental Indenture dated as of October 22, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 5 1/2% Convertible Subordinated Debentures. (7) 4(a)(5) Incorporated by reference in Form 8-A filed with respect to the Registration Statement of the Company's 5 1/2% Convertible Subordinated Debentures dated December 21, 1993 4(a)(6) Incorporated by reference in Form 15 with respect to the notice of termination of the Registration of Price's 5 1/2% Convertible Subordinated Debentures dated January 3, 1994 4(b)(1) 6 3/4% Convertible Subordinated Debenture (2) 4(b)(2) Indenture by and between Price and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures (2) 4(b)(3) Supplemental Indenture dated as of October 21, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures (7) 4(b)(4) Supplemental Indenture dated as of October 22, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures (7) 4(c)(1) 5 3/4% Convertible Subordinated Debenture (5) 4(c)(2) Indenture dated as of May 15, 1992 between Costco and First Trust National Association, as Trustee (5) 4(c)(3) First Supplemental Indenture dated as of October 21, 1993 between Costco, PriceCostco and First Trust National Association, as Trustee (8) 4(d)(1) 7 1/8% Senior Notes and Indentures (13) 4(d)(2) Form of Indenture between Price/Costco, Inc. and American National Association, as Trustee (13) 4(e) Price/Costco, Inc. Stock Certificate (4) 10(a)(1) The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option Plan (4) 10(a)(2) Amendments to Stock Option Plans 10(b) Indemnification Agreement (14) 10(c) Special Severance Agreement (12) 10(j)(5) Agreement between The Price Company, Price Venture Mexico and Controladora Comercial Mexicana S.A. de C.V. to form a Corporate Joint Venture (7) </TABLE>
<TABLE> <C> <S> 10(j)(6) Restated Corporate Joint Venture Agreement between The Price Company, Price Venture Mexico and Controladora Comercial Mexicana S.A. de C.V. dated March, 1995 10(z)(1) A $250,000 Short-Term Revolving Credit Agreement among Price/Costco, Inc. and a group of fourteen banks dated January 31, 1994 (12) 10(z)(2) A $250,000 Extended Revolving Credit Agreement among Price/Costco, Inc. and a group of fourteen banks, dated January 31, 1994 (12) 10(z)(3) Revolving Credit Agreement, dated as of August 28, 1994, between Price/Costco, Inc. and Price Enterprises, Inc. (11) 12.1 Statements re computation of ratios 23.1 Consent of Arthur Andersen LLP 23.2 Report of Ernst & Young LLP on The Price Company Fiscal 1993 Annual Report 27.1 Financial Data Schedule </TABLE> - ------------------------ (1) Registration Statement of The Price Company on Form SE filed February 12, 1987 is hereby incorporated by reference (2) Registration Statement of The Price Company on Form S-3 (File No. 33-38966) filed February 27, 1991 is hereby incorporated by reference (3) Incorporated herein by reference to the identical exhibit filed as part of The Price Company's Form 10-K for the fiscal year ending August 31, 1991 (4) Incorporated by reference to the Registration Statement of Price/Costco, Inc. Form S-4 (File No. 33-50359) dated September 22, 1993 (5) Incorporated by reference to Costco's Registration Statement on Form S-3 (File No. 33-47750) filed May 22, 1992 (6) Incorporated by reference to Schedule 13E-4 of The Price Company and Price/Costco, Inc. filed November 4, 1993 (7) Incorporated by reference to the exhibits filed as part of Amendment No. 1 to the Registration Statement on Form 8-A of The Price Company (8) Incorporated by reference to the exhibits filed as part of Amendment No. 2 to the Registration Statement on Form 8-A of Costco (9) Incorporated by reference to the exhibits filed as part of the Annual Report on Form 10-K/A of Price/Costco, Inc. for the fiscal year ended August 29, 1993 (10) Incorporated by reference to the exhibits filed as part of the Registration Statement on Form S-4 of Price Enterprises, Inc. (File No. 33-55481) filed on September 15, 1994 (11) Incorporated by reference to the exhibits filed as part of Amendment No. 1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. (File No. 33-55481) filed on November 3, 1994 (12) Incorporated by reference to the exhibits filed as part of the Quarterly Report on Form 10-Q of Price/Costco, Inc. for the 12 weeks ended February 13, 1994 (13) Incorporated by reference to the exhibits filed as part of the Registration Statement on Form S-3 of Price/Costco, Inc. (File No. 33-59403) filed on May 17, 1995. (14) Incorporated by reference to the exhibits filed as part of the Annual Report on Form 10K of Price/ Costco, Inc. for the fiscal year ended August 28, 1994.