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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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 AUGUST 28, 1994
[ ] 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 0-020355
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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.)
10809 - 120TH AVENUE N.E., KIRKLAND, WASHINGTON 98033
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 803-8100
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
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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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant at October 31, 1994, was $2,936,443,000.
The number of shares outstanding of the registrant's common stock as of
October 31, 1994, was 217,824,520.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 27, 1995 are incorporated by reference into
Part III of this Form 10-K.
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PRICE/COSTCO, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 28, 1994
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security-Holders......... 12
Item 4A. Executive Officers of Registrant............................ 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 18
Item 8. Financial Statements........................................ 23
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 23
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 23
Item 11. Executive Compensation...................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 23
Item 13. Certain Relationships and Related Transactions.............. 23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................ 24
2
PART I
ITEM 1 -- BUSINESS
DESCRIPTION OF THE MERGER
On October 21, 1993, the shareholders of both The Price Company ("Price")
and Costco Wholesale Corporation ("Costco") approved the mergers of Price and
Costco with and into separate, wholly owned subsidiaries of Price/Costco, Inc.
("PriceCostco" or the "Company"). The mergers are hereinafter called the
"Merger." PriceCostco was formed to effect the Merger. Pursuant to the Merger,
Price and Costco each became a wholly owned subsidiary of PriceCostco. In the
Merger, shareholders of Price received 2.13 shares of PriceCostco common stock
for each share of Price common stock and shareholders of Costco received one
share of PriceCostco common stock for each share of Costco common stock.
The Merger qualified as a "pooling-of-interests" for accounting and
financial reporting purposes. The pooling-of-interests method of accounting
presents as a single interest two or more common shareholder interests which
were previously independent. The pooling-of-interests method of accounting
treats the combining companies as if they had been a single business entity from
inception. Consequently, the historical financial statements for periods prior
to the consummation of the Merger have been restated as though the companies had
been combined. The financial statements have also been adjusted to conform the
accounting policies and interim reporting periods of the separate companies.
The fees and expenses related to the Merger and to the consolidation and
restructuring of the combining companies (approximately $120 million, or $80
million after tax) were expensed as required under the pooling-of-interests
accounting method and were reflected in the consolidated statement of income of
PriceCostco in the first quarter of fiscal 1994, the period in which the Merger
occurred. Such fees and expenses include direct transaction costs, expenses
related to consolidating and restructuring certain functions, costs of the
closing of certain excess facilities and sales of related properties, costs of
severance and relocation and write-offs of certain redundant capitalized costs
and other assets (See "Notes to Consolidated Financial Statements -- Note 2 --
Merger of Price and Costco" for an analysis of the provision for merger and
restructuring).
GENERAL
PriceCostco operates cash and carry 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.
3
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 120,000 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.
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. Problems associated with
dishonored checks have also been insignificant, 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 very low 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 the traditional discount or grocery retailer, 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 an efficient centralized
check-out facility. Items are not individually price marked, but are keyed or
scanned into PriceCostco's electronic cash registers by an identifying item
number, thereby allowing price changes without remarking merchandise.
Substantially all manufacturers provide special, larger package sizes and
merchandise pre-marked with the item numbers.
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. Consequently,
items which members may request but which cannot be purchased at prices
sufficiently low enough to pass along meaningful cost savings to members are
often 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 4,000 active stockkeeping units ("SKU's") per
warehouse as opposed to full-line discount retailers 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
4
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.
The following table indicates the approximate percentage of sales accounted
for by each major category of items sold by PriceCostco during fiscal 1994, 1993
and 1992:
1994 1993 1992
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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)...... 31 31 31
HARDLINES (including major appliances, video and audio tape, electronics,
tools, office supplies, furniture and automotive supplies).................. 22 21 21
SOFTLINES (including apparel, linens, cameras, jewelry, housewares, books and
small appliances)........................................................... 12 13 14
OTHER (including pharmacy, optical, tire installation, food concession,
miscellaneous).............................................................. 3 3 2
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
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. Also, PriceCostco purchases on a
competitive cost basis, stocking different national brand name or selected
private label merchandise of the same product, as long as 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 also to 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 $35 for the primary membership card with additional membership
cards available for an annual fee of from $10 to $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 second membership card.
As of August 28, 1994, PriceCostco had approximately 3.4 million Business
memberships and approximately 6.4 million Gold Star memberships. Members can
utilize their memberships at any Price Club or Costco Wholesale location.
5
LABOR
As of August 28, 1994, PriceCostco had approximately 47,000 employees, about
50% of which were part time. Substantially all of Price's hourly employees in
California, Connecticut, Maryland, Massachusetts, New Jersey, New York and one
Price Club warehouse in Virginia are represented by the International
Brotherhood of Teamsters. Nearly all other employees 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 800 warehouse clubs exist across the U.S. and Canada, including
the 221 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 gained major
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 food business,
a competitor like Smart & Final, which operates in Arizona and California, is
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. This
factor, among others, has caused comparable warehouse sales to decline during
fiscal 1994 resulting in lower average sales and earnings per location (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 mass merchandisers 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.
DESCRIPTION OF THE EXCHANGE TRANSACTION
On July 28, 1994, PriceCostco entered into an Agreement of Transfer and Plan
of Exchange (as amended and restated, the "Transfer and Exchange Agreement")
with Price Enterprises, Inc., ("Price Enterprises"). Price Enterprises is a
Delaware corporation and an indirect, wholly owned subsidiary of the Company.
The transactions contemplated by the Transfer and Exchange Agreement are
hereinafter referred to as the "Exchange Transaction."
Pursuant to the Transfer and Exchange Agreement and upon the terms and
subject to the conditions set forth in an Offering Circular/Prospectus and
related Letter of Transmittal (which will be mailed to stock holders of record
of the Company's common stock), the Company will offer to
6
exchange one share of common stock of Price Enterprises for each share of common
stock of the Company, up to a maximum of 27 million shares of Price Enterprises
common stock (constituting all of the outstanding shares of Price Enterprises
common stock) (the "Exchange Offer"). The Company currently anticipates that the
Exchange Offer will be commenced prior to the end of November 1994. In
connection therewith, the Offering Circular/Prospectus and the Letter of
Transmittal, which will describe the Exchange Transaction in detail, will be
mailed to such holders. If more than 27 million shares of the Company's common
stock are validly tendered and not withdrawn in the Exchange Offer prior to the
expiration thereof, then, upon the terms and subject to the conditions set forth
in such Offering Circular/Prospectus and such related Letter of Transmittal, the
Company will accept 27 million shares for exchange on a pro rata basis, and
shares of Price Enterprises common stock will be exchanged therefor.
If the number of shares of the Company's common stock validly tendered in
the Exchange Offer by holders of the Company's common stock is less than 21.6
million, the Company will accept such validly tendered shares for exchange and
will distribute the remaining shares of Price Enterprises common stock pro rata
to the Company's stockholders. If the number of shares of the Company's common
stock validly tendered in the Exchange Offer is greater than 21.6 million, but
less than 27 million, the Company will accept such validly tendered shares for
exchange and will, at its option, either (i) distribute the remaining shares of
Price Enterprises common stock pro rata to the Company's stockholders or (ii)
sell such remaining shares to Price Enterprises in exchange for a promissory
note.
Pursuant to the Transfer and Exchange Agreement, as of August 28, 1994, the
Company caused to be transferred, or, in certain cases, will cause to be
transferred, to Price Enterprises certain assets, including the following:
(a) certain commercial real estate specified in the Transfer and
Exchange Agreement that was not integral to the Company's merchandising
operations (the "Commercial Properties");
(b) real estate comprising four of the Company's warehouse club
facilities (which are adjacent to existing Commercial Properties) that are
being leased back to the Company effective August 29, 1994 at collective
annual rentals of approximately $8.6 million;
(c) commercial real estate known as 4455 and 4649 Morena Boulevard, San
Diego, California;
(d) 51% of the outstanding capital stock of each of Price Global and
Price Quest (as defined and described below);
(e) a note in the principal amount of $41 million made by Atlas Hotels,
Inc., secured by hotel and convention center property in San Diego,
California ("Atlas Note"); and
(f) notes receivable with an aggregate book value of approximately $32
million, which were originally made and delivered by various governmental
agencies in connection with the financing and development of certain
warehouse club and adjacent real estate sites.
The Company and Price Enterprises have caused to be formed a limited
liability company, Mexico Clubs, L.L.C. ("Mexico Clubs") of which the Company
and Price Enterprises own 49% and 51% interests, respectively. The Company has
caused to be formed two corporations, Price Global Trading, Inc. ("Price
Global") and Price Quest, Inc. ("Price Quest" which, together with Mexico Clubs
comprise the "Subsidiary Corporations". The Company has caused to be transferred
and delivered to:
(a) Mexico Clubs: (i) all shares of capital stock of Price Venture
Mexico owned, directly or indirectly, by the Company; (ii) all other
noncurrent assets of the Company and its subsidiaries specifically related
to the conduct of business in Mexico; and (iii) certain other assets
(collectively, the "Mexico Assets"); provided, however, that the term
"Mexico Assets" does not include (A) the
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Agreement between Price, Price Venture Mexico and Controladora Comercial
Mexicana, S.A. de C.V. to form a Corporate Joint Venture dated June 21,
1991, (B) any right, title or interest in or to the names "Price Club,"
"Price Club Costco" or "PriceCostco" and (C) any computer software.
(b) Price Global: (i) the right to develop a Club Business in certain
international areas specified in the Transfer and Exchange Agreement (the
"Specified Geographical Areas"); (ii) all shares of capital stock of Club
Merchandising, Inc. owned, directly or indirectly, by the Company; (iii) all
right, title and interest to, or, in certain cases, a long-term license to
use, the names "Price Club," "Price Club Costco" and "Price Costco" in each
of the Specified Geographical Areas (other than Mexico); and (iv) all other
noncurrent assets of the Company and its subsidiaries (other than those
included in Club Merchandising, Inc.) specifically related to the conduct of
business in the Specified Geographical Areas (collectively, the
"International Assets"); and
(c) Price Quest: (i) all of the noncurrent assets of the Company or any
of its subsidiaries specifically related to the business and operations then
conducted by the Company through its Quest interactive electronic shopping
business, together with Price Club Travel, Price Club Realty and the Price
Club automobile advertising/referral business; (ii) all right, title and
interest, if any, of the Company or any of its subsidiaries to, or, in
certain cases, a long-term license to use, the names "Price Club Quest" and
"Quest"; and (iii) certain other assets (collectively, the "Quest Assets").
As used herein, the term "Club Business" refers to any merchandising
activity utilizing 70,000 square feet or more in a single location operating
with membership and selling food and non-food items through a central check-out.
Each of Price Global and Price Quest issued 100 shares of its common stock
to Price, which constitutes all of the outstanding capital stock of each such
Subsidiary Corporation. As of August 28, 1994, the Company caused to be
transferred to Price Enterprises 51 shares of common stock of each of Price
Global and Price Quest, representing 51% of the outstanding capital stock of
each such Subsidiary Corporation.
As part of the Exchange Transaction, the Company and Price, on the one hand,
and Price Enterprises and each of the Subsidiary Corporations, on the other,
have entered into Operating Agreements to clarify the ongoing business
relationship between the Company and the respective Subsidiary Corporations. The
Company and Price, on the one hand, have also entered into Stockholders
Agreements with Price Enterprises and each of Price Global and Price Quest, on
the other, to clarify certain rights and obligations of the Company and Price
Enterprises as stockholders of Price Global and Price Quest.
Price and Price Enterprises have entered into a Limited Liability Company
Agreement with respect to Mexico Clubs which sets forth the rights and
obligations of each of Price and Price Enterprises with respect to its
membership interest in Mexico Clubs.
Also in connection with the Exchange Transaction, the Company and Price
Enterprises entered into an unsecured revolving credit agreement, dated as of
August 28, 1994 (the "Advance Agreement"), pursuant to which the Company has
agreed to advance to Price Enterprises up to a maximum principal amount of $85
million (reduced by an amount equal to the net proceeds from the sale of any of
the Commercial Properties between August 28, 1994 and the date of the closing of
the Exchange Transaction (the "Closing Date")) from time to time during the
period from August 28, 1994 until six months following the earlier of (A) the
Closing Date and (B) the date on which Price Enterprises stock is distributed to
stockholders of the Company. The interest rate under the Advance Agreement is
the weighted average commercial paper rate on borrowings by the Company during
each four-week period (including, without limitation, amortization of lender
commitment fees and other costs associated with the backup line of credit and
all miscellaneous costs and fees), or if commercial paper is unavailable under
the Company's commercial paper program, the bank rate on borrowings by the
Company pursuant to its working capital credit facility (including, without
limitation, amortization of lender commitment fees and other costs associated
with such credit facility and all miscellaneous costs and fees).
8
Pursuant to the Transfer and Exchange Agreement, upon the earlier to occur
of the Closing Date and the date that shares of Price Enterprises common stock
are distributed to holders of the Company's common stock, the Bylaws of the
Company will be amended to delete the corporate governance provisions that were
enacted as part of the Merger to require that the Board of Directors of the
Company and certain committees of the Board be comprised of an equal number of
Price Designees and Costco Designees (as such terms are hereinafter defined).
The form of such Bylaws, as amended, is filed as an Exhibit to this Annual
Report on Form 10-K. In addition, at the Closing Date, without any further
action on behalf of the Company or Price Enterprises, the resignations of all of
the Price Designees from the Board of Directors of the Company, other than
Richard M. Libenson and Duane Nelles (which resignations were submitted to the
Board of Directors of the Company on July 28, 1994), will become effective.
Pursuant to the Transfer and Exchange Agreement, unless removed for cause, each
of Messrs. Libenson and Nelles shall serve on the Board of Directors of the
Company until the earlier of (i) the date two years following the Closing Date
and (ii) such time as Sol Price and Robert Price and their affiliates in the
aggregate cease to beneficially own at least two million shares of PriceCostco
Common Stock (including any such shares owned by charitable trusts established
by either of them).
As used in the Bylaws of the Company, "Price Designees" means those persons
specified by Price as initial members of the Board of Directors of the Company
as of the effective time of the Merger, or their direct or indirect
replacements. The current Price Designees are J. Paul Kinloch, Richard M.
Libenson, Mitchell G. Lynn, Duane Nelles (who was elected to the Board on July
28, 1994 following the resignation of Joseph K. Kornwasser), Paul A. Peterson
and Robert E. Price. As used in the Bylaws of the Company, "Costco Designees"
means those persons specified by Costco as initial members of the Board of
Directors of the Company as of the effective time of the Merger, or their direct
or indirect replacements. The current Costco Designees are Jeffrey H. Brotman,
Daniel Bernard, Richard D. DiCerchio, Hamilton E. James, John W. Meisenbach and
James D. Sinegal.
FUTURE OPERATIONS
Expansion plans for the United States and Canada during fiscal 1995 are to
open 30-35 new warehouse clubs. The Company also expects to continue expansion
of its international operations. The Company opened two warehouses in the United
Kingdom through a 60%-owned subsidiary, with a third location due to open in
June 1995. In October 1994, under a licensing agreement with PriceCostco, a
Price Club opened in Seoul, Korea. Other markets are being assessed,
particularly in the Pacific Rim. As a result of the Exchange Transaction, the
Company's 50% ownership interest in the Mexican joint venture was transferred to
Mexico Clubs in which the Company owns a 49% interest. See "Part I -- Business
- -- Description of the Exchange Transaction." As of August 28, 1994, there were 8
Price Clubs operating in Mexico through such joint venture. As of October 31,
1994, there were 10 Price Clubs operating in Mexico through such joint venture
with one more scheduled to open prior to December 31, 1994.
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 $600 million to $700 million
during fiscal 1995: for real estate, building and equipment for warehouse clubs
and related operations (including remodels and expansions) in the United States
and Canada; for international expansion, including additional investment in the
United Kingdom and other potential ventures; and for activities such as business
delivery and ancillary business operations.
While the availability of capital resources cannot be predicted with
certainty and is dependent upon a number of factors, including factors outside
of the Company's control, management believes that the Company's earnings, cash
flow, and financing capacity should be adequate to fund ongoing operations,
proposed expansion and other planned development efforts.
As a result of the Exchange Transaction, the Company will own a 49% interest
in each of the Mexico Assets, the International Assets and the Quest Assets. See
"Description of the Exchange Transaction" above.
9
ITEM 2 -- PROPERTIES
WAREHOUSE PROPERTIES
At August 28, 1994, 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
state and province:
NUMBER OF WAREHOUSES
OWN LAND AND LEASE LAND AND/OR
BUILDING BUILDING GRAND TOTALS
-------------------- -------------------- --------------------
PRICE COSTCO TOTAL PRICE COSTCO TOTAL PRICE COSTCO TOTAL
----- ------ ----- ----- ------ ----- ----- ------ -----
UNITED STATES
Arizona................................ 5 -- 5 2 -- 2 7 -- 7
Alaska................................. -- 3 3 -- -- -- -- 3 3
California (a)......................... 34 30 64 6 12 18 40 42 82
Colorado............................... 3 -- 3 -- -- -- 3 -- 3
Connecticut............................ -- 2 2 1 1 2 1 3 4
Florida................................ -- 10 10 -- 1 1 -- 11 11
Idaho.................................. -- 1 1 -- 1 1 -- 2 2
Hawaii................................. -- 1 1 -- 2 2 -- 3 3
Massachusetts.......................... -- 4 4 -- -- -- -- 4 4
Maryland............................... 3 -- 3 1 -- 1 4 -- 4
Montana................................ -- 3 3 -- -- -- -- 3 3
Nevada................................. -- 2 2 -- 1 1 -- 3 3
New Jersey (a)......................... 5 2 7 -- -- -- 5 2 7
New Hampshire.......................... -- 2 2 -- -- -- -- 2 2
New Mexico............................. 1 -- 1 -- -- -- 1 -- 1
New York (a)........................... 4 2 6 1 -- 1 5 2 7
Oregon................................. -- 8 8 -- 1 1 -- 9 9
Utah................................... -- -- -- -- 1 1 -- 1 1
Vermont................................ -- -- -- -- 1 1 -- 1 1
Virginia (a)........................... 8 -- 8 1 -- 1 9 -- 9
Washington............................. -- 14 14 -- 2 2 -- 16 16
----- ------ ----- ----- ------ ----- ----- ------ -----
Total United States.................. 63 84 147 12 23 35 75 107 182
----- ------ ----- ----- ------ ----- ----- ------ -----
CANADA
Alberta................................ -- 5 5 -- 1 1 -- 6 6
British Columbia....................... -- 6 6 1 -- 1 1 6 7
Ontario................................ 3 1 4 4 1 5 7 2 9
Saskatchewan........................... -- 1 1 1 -- 1 1 1 2
Quebec................................. 6 -- 6 4 -- 4 10 -- 10
Manitoba............................... -- 2 2 -- -- -- -- 2 2
Nova Scotia............................ 1 -- 1 -- -- -- 1 -- 1
----- ------ ----- ----- ------ ----- ----- ------ -----
Total Canada......................... 10 15 25 10 2 12 20 17 37
----- ------ ----- ----- ------ ----- ----- ------ -----
UNITED KINGDOM........................... -- 2 2 -- -- -- -- 2 2
----- ------ ----- ----- ------ ----- ----- ------ -----
Grand Totals......................... 73 101 174 22 25 47 95 126 221
----- ------ ----- ----- ------ ----- ----- ------ -----
----- ------ ----- ----- ------ ----- ----- ------ -----
- ------------------------
(a) Effective August 28, 1994, the Company transferred to Price Enterprises
real estate comprising four of the Company's warehouse club facilities
(which are adjacent to Commercial Properties transferred or to be
transferred to Price Enterprises as part of the Exchange Transaction). The
10
warehouse properties are being leased back to the Company by Price
Enterprises effective August 29, 1994. The four warehouses are located in
San Diego, California; Wayne, New Jersey; Westbury, New York; and Pentagon
City, Virginia.
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, 1994:
UNITED STATES TOTAL
----------------- OTHER WAREHOUSES
OPENINGS BY FISCAL YEAR WESTERN EASTERN TOTAL CANADA INTERNATIONAL TOTAL IN OPERATION
- -------------------------------------------------- ------- ------- ----- ------ ------------- ----- ------------
1989 and prior.................................... 75 21 96 8 -- 104 104
1990.............................................. 9 2 11 4 -- 15 119
1991.............................................. 9 4 13 8 -- 21 140
1992.............................................. 15 12 27 3 -- 30 170
1993.............................................. 17 6 23 7 -- 30 200
1994.............................................. 8 4 12 7 2 21 221
1995 (through 12/31/94)........................... 4 -- 4 6 -- 10 231
------- ------- ----- ------ --- -----
Total......................................... 137 49 186 43 2(a) 231
------- ------- ----- ------ --- -----
------- ------- ----- ------ --- -----
- ------------------------
(a) As of August 28, 1994, the Company operated (through a 50%-owned joint
venture) eight warehouses in Mexico (one opened in fiscal 1992, two opened
in fiscal 1993, five opened in fiscal 1994). 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. As described
under "Description of the Exchange Transaction," such 50% ownership
interest in such joint venture was transferred to Mexico Clubs as part of
the Exchange Transaction.
The Company's home offices and headquarters are located in Kirkland,
Washington and San Diego, California. Following consumation of the Exchange
Transaction, the Company will no longer maintain a home office and headquarters
in San Diego, California. 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.
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 case was dismissed with prejudice by the Court on March 9,
1993, on grounds the plaintiffs had failed to state a sufficient claim against
defendants. Plaintiffs have filed an Appeal in the Ninth Circuit Court of
Appeals, which was argued on October 4, 1994. The Company is currently awaiting
a Ninth Circuit Court of Appeals decision. If the Ninth Circuit Court of Appeals
renders a decision that is adverse to the Company, the Company will continue its
vigorous defense of the suit. The Company does not believe that the ultimate
outcome of such litigation will have a material adverse effect on the Company's
financial position or results of operations.
11
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 January 27, 1995
at the Bellevue Inn in Bellevue, Washington. 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.
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.
AGE POSITION WITH COMPANY
--- -------------------------------------------------------------
Robert E. Price 52 Chairman of the Board
James D. Sinegal 58 President and Chief Executive Officer
Jeffrey H. Brotman 51 Vice Chairman of the Board
Mitchell G. Lynn 45 President of Price
Richard D. DiCerchio 51 Executive Vice President -- Merchandising, Distribution,
Construction and Marketing
Richard A. Galanti 38 Executive Vice President and Chief Financial Officer
Franz E. Lazarus 47 Executive Vice President, Chief Operating Officer -- Northern
Division
David B. Loge 52 Executive Vice President -- PriceCostco Industries
Edward B. Maron 67 Executive Vice President, Chief Operating Officer -- Canadian
Division
Joseph P. Portera 41 Executive Vice President, Chief Operating Officer -- Eastern
Division
Steven A. Velazquez 39 Executive Vice President -- Quest
Theodore Wallace 46 Executive Vice President -- International
Dennis R. Zook 45 Executive Vice President, Chief Operating Officer -- Southern
Division
Robert E. Price has been the Chairman of the Board of PriceCostco since the
Merger, although he has tendered his resignation effective as of the earlier of
(i) the Closing Date and (ii) the date on which shares of Price Enterprises
common stock are distributed to stockholders of PriceCostco (see "Description of
the Exchange Transaction"). He was Chief Executive Officer and a director of
Price since 1976, and was Chairman of the Board of Price since January 1989. Mr.
Price was President of Price from 1976 until December 1990.
James D. Sinegal has been the President, Chief Executive Officer and a
director of PriceCostco since the Merger. He was President and Chief Operating
Officer of Costco since its inception and was elected Chief Executive Officer in
August 1988. Mr. Sinegal is a co-founder of Costco and a director of Price
Enterprises.
Jeffrey H. Brotman is a native of the Pacific Northwest and is a 1967
graduate of the University of Washington Law School. Mr. Brotman has been the
Vice Chairman of the Board of PriceCostco since the Merger. He is a founder of
Costco and a number of other specialty retail chains. Mr. Brotman is a director
of Seafirst Bank; Carrefour, U.S.; Starbucks Corp.; The Sweet Factory and Garden
Botanika.
Mitchell G. Lynn served as Senior Executive Vice President of PriceCostco
from the Merger until mid July 1994 and has been a director of PriceCostco since
the Merger, although he has tendered his resignation effective as of the earlier
of (i) the Closing Date and (ii) the date on which shares of Price Enterprises
common stock are distributed to stockholders of PriceCostco (see "Description of
the
12
Exchange Transaction"). He has been President of Price since December 1990 and a
director of Price since January 1991, although he has tendered his resignation
as an officer and director of Price effective as of the earlier of (i) the
Closing Date and (ii) the date on which shares of Price Enterprises common stock
are distributed to stockholders of PriceCostco. Mr. Lynn joined Price as
Controller in September 1979 and became a Vice President in 1984. From August
1989 to December 1990 Mr. Lynn was an Executive Vice President of Price and
President of Price Club Industries, a division of Price.
Richard D. DiCerchio has been Executive Vice President -- Merchandising,
Distribution, Construction and Marketing of PriceCostco since 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. He was Senior Vice President, Chief
Financial Officer and Treasurer of Costco since January 1985, having joined
Costco as Vice President -- Finance in March 1985. From 1978 to February 1984,
Mr. Galanti was an Associate with Donaldson, Lufkin & Jenrette Securities
Corporation.
Franz E. Lazarus has been Executive Vice President, Chief Operating Officer
- -- Northern Division of PriceCostco since August 1994 and had previously served
as 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 an Executive Vice President -- PriceCostco Industries
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.
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 previously held
various management positions since joining Costco in June 1985.
Joseph P. Portera has been Executive Vice President, Chief Operating Officer
- -- Eastern Division of Price Costco 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 held various management positions
since joining Costco in April 1984.
Steven A. Velazquez was Executive Vice President -- Quest of PriceCostco
from the Merger through early November 1994, overseeing the development of the
Quest business. He is currently an Executive Vice President of Price
Enterprises. He joined Price as a buyer in July 1981, became Vice President in
February 1989, and became Executive Vice President of Merchandising in April
1990. Prior to joining Price, Mr. Velazquez was a buyer for Safeway Stores, San
Diego Division.
Theodore Wallace was Executive Vice President -- International of
PriceCostco from the Merger through early November 1994, overseeing
international expansion into the Pacific rim and other markets. He is currently
an Executive Vice President of Price Enterprises. Mr. Wallace became an
Executive Vice President of Price in 1984 and, from 1988 until Fall 1992, he was
Chief Operating Officer (East Coast) of Price. He was a director of Price from
October 1988 to October 1993. He joined Price as a warehouse manager in
September 1977 and was its Vice President of Operations from 1983 to 1988.
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. He joined Price as a warehouse
manager in October 1982.
13
PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In the Merger, which occurred on October 21, 1993, each share of common
stock, par value $.10 per share, of Price ("Price Common Stock") was exchanged
for 2.13 shares of PriceCostco Common Stock and each share of common stock, par
value $.0033 per share, of Costco ("Costco Common Stock") was exchanged for one
share of PriceCostco Common Stock.
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."
Trading in PriceCostco Common Stock commenced on October 22, 1993. PriceCostco
Common Stock is quoted on The Nasdaq Stock Market's National Market under the
symbol "PCCW."
The following table sets forth the high and low sales prices of PriceCostco
Common Stock for the period October 22, 1993 through October 31, 1994, and Price
Common Stock and Costco Common Stock for the periods indicated. The quotations
are as reported in published financial sources.
PRICECOSTCO
PRICE COSTCO COMMON STOCK
COMMON STOCK COMMON STOCK
------------------ ------------------ ------------------
HIGH LOW HIGH LOW HIGH LOW
------- ------- ------- ------- ------- -------
Calendar Quarters -- 1991
First Quarter............................................. 22 1/8 17 3/4 24 7/8 15 1/8 -- --
Second Quarter............................................ 27 1/2 21 1/2 30 1/2 22 7/8 -- --
Third Quarter............................................. 30 5/8 23 1/2 33 3/8 26 3/8 -- --
Fourth Quarter............................................ 29 1/8 20 1/2 39 1/2 24 5/8 -- --
Calendar Quarters -- 1992
First Quarter............................................. 25 7/8 21 42 5/8 35 1/8 -- --
Second Quarter............................................ 21 7/8 13 3/4 38 1/4 25 1/2 -- --
Third Quarter............................................. 16 1/2 14 30 20 1/2 -- --
Fourth Quarter............................................ 21 1/8 14 1/2 30 1/2 20 1/4 -- --
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 (through October 31, 1994)................. -- -- -- -- 16 3/4 14 7/8
All Costco common share data has been adjusted to reflect a two-for-one
stock split effected April 30, 1991 and a three-for-two stock split effected
March 6, 1992. All Price common share data has been adjusted to reflect the 2.13
exchange ratio in the Merger.
On October 31, 1994, the last reported sales price per share of PriceCostco
Common Stock was $15.75. On October 31, 1994, the Company had approximately
13,811 stockholders of record.
14
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 August 28, 1994 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," consolidated financial statements of PriceCostco for fiscal 1994.
As discussed in "Notes To Consolidated Financial Statements," certain
adjustments and reclassifications have been made to conform the two companies'
accounting practices.
15
PRICE/COSTCO, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
AUGUST 28, AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2,
1994 1993 1992 1991 1990
----------- ----------- ----------- ------------ ------------
OPERATING DATA
Revenue
Net sales..................................................... $16,160,911 $15,154,685 $13,820,380 $11,813,509 $9,346,099
Membership fees and other..................................... 319,732 309,129 276,998 228,742 185,144
----------- ----------- ----------- ------------ ------------
Total revenue................................................. 16,480,643 15,463,814 14,097,378 12,042,251 9,531,243
Operating expenses
Merchandise costs............................................. 14,662,891 13,751,153 12,565,463 10,755,823 8,518,951
S,G&A expenses................................................ 1,425,549 1,314,660 1,128,898 934,120 719,446
Preopening expenses........................................... 24,564 28,172 25,595 16,289 11,691
Provision for estimated warehouse closing costs............... 7,500 5,000 2,000 1,850 6,000
----------- ----------- ----------- ------------ ------------
Operating income.............................................. 360,139 364,829 375,422 334,169 275,155
Other income (expense)
Interest expense.............................................. (50,472) (46,116) (35,525) (26,041) (18,769)
Interest income and other..................................... 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.......................................................... 203,555 336,463 368,855 342,041 275,625
Provision for income taxes...................................... 92,657 133,620 145,833 134,748 107,899
----------- ----------- ----------- ------------ ------------
Income from continuing operations............................... 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............................................ (182,500) -- -- -- --
Extraordinary items............................................. -- -- -- -- --
----------- ----------- ----------- ------------ ------------
Net income (loss)............................................... $ (112,368) $ 223,247 $ 242,407 $ 218,859 $ 174,580
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
Per Share Data -- Fully Diluted
Income (loss) from continuing operations...................... $ 0.51 $ 0.92 $ 0.98 $ 0.93 $ 0.79
Discontinued Operations:
Income (loss), net of tax................................... (.19) .08 .08 .05 .03
Loss on Disposal............................................ (.83) -- -- -- --
Extraordinary items........................................... -- -- -- -- --
----------- ----------- ----------- ------------ ------------
Net income (loss)............................................. $ (.51) $ 1.00 $ 1.06 $ 0.98 $ 0.82
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
Shares used in calculation (000's)............................ 219,334 240,162 245,090 234,202 219,532
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 3, AUGUST 28, AUGUST 30, AUGUST 31, SEPTEMBER 1,
1989 1988 1987 1986 1985
------------ ---------- ---------- ---------- ------------
OPERATING DATA
Revenue
Net sales..................................................... $7,844,539 $6,042,159 $4,606,352 $3,337,361 $2,200,338
Membership fees and other..................................... 157,621 125,985 98,201 70,695 40,795
------------ ---------- ---------- ---------- ------------
Total revenue................................................. 8,002,160 6,168,144 4,704,553 3,408,056 2,241,133
Operating expenses
Merchandise costs............................................. 7,168,907 5,531,626 4,198,768 3,040,115 1,989,621
S,G&A expenses................................................ 590,465 458,013 355,178 256,407 170,869
Preopening expenses........................................... 11,685 6,509 12,784 4,031 3,214
Provision for estimated warehouse closing costs............... 1,609 4,000 -- -- --
------------ ---------- ---------- ---------- ------------
Operating income.............................................. 229,494 167,996 137,823 107,503 77,429
Other income (expense)
Interest expense.............................................. (24,583) (20,949) (13,840) (8,249) (7,684)
Interest income and other..................................... 24,275 22,341 20,936 21,281 15,183
Provision for merger and restructuring expenses............... -- -- -- -- --
------------ ---------- ---------- ---------- ------------
Income from continuing operations before provision for income
taxes.......................................................... 229,186 169,388 144,919 120,535 84,928
Provision for income taxes...................................... 88,742 67,533 68,019 58,162 44,693
------------ ---------- ---------- ---------- ------------
Income from continuing operations............................... 140,444 101,855 76,900 62,373 40,235
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 $ 40,235
------------ ---------- ---------- ---------- ------------
------------ ---------- ---------- ---------- ------------
Per Share Data -- Fully Diluted
Income (loss) from continuing operations...................... $ 0.69 $ 0.56 $ 0.42 $ 0.37 $ 0.31
Discontinued Operations:
Income (loss), net of tax................................... .02 -- -- -- --
Loss on Disposal............................................ -- -- -- -- --
Extraordinary items........................................... -- 0.02 0.01 0.01 --
------------ ---------- ---------- ---------- ------------
Net income (loss)............................................. $ 0.71 $ 0.58 $ 0.43 $ 0.38 $ 0.31
------------ ---------- ---------- ---------- ------------
------------ ---------- ---------- ---------- ------------
Shares used in calculation (000's)............................ 212,772 181,336 180,887 168,324 130,367
16
PRICE/COSTCO, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT WAREHOUSE AND PER SHARE DATA)
AUGUST 28, AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2, SEPTEMBER 3,
1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ------------ ------------ ------------
BALANCE SHEET DATA
Working capital (deficit)................... $ (113,009) $ 127,312 $ 281,592 $ 304,703 $ 14,342 $ 103,252
Property and equipment, net................. 2,146,396 1,966,601 1,704,052 1,183,432 935,767 752,912
Total assets................................ 4,235,659 3,930,799 3,576,543 2,986,094 2,029,931 1,740,332
Short-term debt............................. 149,340 23,093 -- -- 139,414 114,000
Long-term debt and capital lease
obligations, net........................... 795,492 812,576 813,976 500,440 199,506 234,017
Stockholders' equity (a)(b)................. 1,684,960 1,796,728 1,593,943 1,429,703 988,458 777,730
WAREHOUSES IN OPERATION
Beginning of year........................... 200 170 140 119 104 84
Opened...................................... 29 37 31 23 19 20
Closed...................................... (8) (7) (1) (2) (4) --
---------- ---------- ---------- ------------ ------------ ------------
End of Year................................. 221 200 170 140 119 104
---------- ---------- ---------- ------------ ------------ ------------
---------- ---------- ---------- ------------ ------------ ------------
AUGUST 28, AUGUST 30, AUGUST 31, SEPTEMBER 1,
1988 1987 1986 1985
---------- ---------- ----------- ------------
BALANCE SHEET DATA
Working capital (deficit)................... $ 208,569 $ 244,783 $ 173,765 $ 114,924
Property and equipment, net................. 511,784 411,590 234,813 134,404
Total assets................................ 1,445,814 1,205,843 769,799 476,945
Short-term debt............................. -- -- -- --
Long-term debt and capital lease
obligations, net........................... 327,760 333,503 124,475 100,425
Stockholders' equity (a)(b)................. 585,598 468,045 384,275 185,881
WAREHOUSES IN OPERATION
Beginning of year........................... 77 47 36 22
Opened...................................... 10 30 11 14
Closed...................................... (3) -- -- --
---------- ---------- ----------- ------------
End of Year................................. 84 77 47 36
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
- ------------------------------
(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.
17
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1994 (52 WEEKS) AND FISCAL 1993 (52 WEEKS):
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net operating results for fiscal 1994 reflect 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). This loss includes the previously announced
provision for merger and restructuring costs of $120,000 pre-tax ($80,000 or
$.36 per share after tax) related to the Merger. The Merger was approved by
Price and Costco shareholders on October 21, 1993. The fiscal 1994 net loss
includes a $40,766 or $.19 per share loss from discontinued operations, compared
to income of $20,404 or $.08 per share in fiscal 1993. The fiscal 1994 loss from
discontinued operations includes a 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. In addition, the fiscal 1994 net loss includes a 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 8
warehouses closed during fiscal 1994 that were in operation during fiscal 1993;
and (ii) increased sales at thirty-seven 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 impact 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 membership signups at the twenty-nine new warehouses and
the partial year effect of membership fee increases implemented in January 1994.
As anticipated, the Company experienced a decline in membership renewals at
existing warehouses due to overlapping memberships and offering Price and Costco
members reciprocal member privileges effective November 1, 1993. The negative
impact of the reciprocal member privileges on membership fee revenue is expected
to be a less significant factor after November 1994.
Gross margin (defined as net sales minus merchandise costs) increased 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
18
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 $24,564 or 0.15% of net sales during fiscal 1994
and $28,172 or 0.19% of net sales during fiscal 1993. 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
includes $5,750 (pre-tax) related to settlement of a 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 or will be replaced by new warehouses by December 31, 1994. This compares
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
The loss on discontinued real estate operations (net of operating expenses
and taxes) includes 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 or $.22 per share) relates to a change in
calculating estimated losses for assets which are considered to be economically
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 strategies of the Company.
Specifically, 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 such that
impairment losses if the carrying amount of the asset could not be recovered
from estimated future cash flows on an undiscounted basis. Price Enterprises
management believes that in view of its strategies with respect to the number
and nature of properties that would be selected for potential 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.
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, relates 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 "Part I -- Business --
Description of
19
the Exchange Transaction." The estimated loss on disposal is a non-recurring
special charge calculated as the difference between the aggregate book value of
the net assets being spun-off of $579,000 and the estimated market value of 27
million shares of Price Enterprises common stock of $411,750 plus direct
transaction costs of approximately $15,250. The Exchange Transaction is expected
to close before the end of the calendar year, at which time the estimated loss
on disposal will be adjusted to actual. For a more detailed discussion of the
estimated loss on disposal and the factors that will affect the amount of any
adjustment to the loss after the Transaction is completed, see Note 3 -- Spin
off of Price Enterprises, Inc. and Discontinued Operations.
COMPARISON OF FISCAL 1993 (52 WEEKS) AND FISCAL 1992 (52 WEEKS):
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net income during fiscal 1993 decreased 8% to $223,247, or $1.00 per share
(fully diluted), as compared to fiscal 1992 net income of $242,407 or $1.06 per
share (fully diluted).
CONTINUING OPERATIONS
Income from continuing operations for fiscal 1993 was $202,843 or $.92 per
share, compared to fiscal 1992 income from continuing operations of $223,022 or
$.98 per share.
Net sales increased 10% to $15,154,685 in fiscal 1993 from $13,820,380 in
fiscal 1992. This increase was due to: (i) first year sales at the thirty-seven
new warehouses opened during fiscal 1993; and (ii) increased sales at thirty-one
warehouses that were opened in 1992 and that were in operation for the entire
fiscal year, which increase was partially offset by lower sales at existing
locations opened prior to fiscal 1992. Changes in prices did not materially
affect sales levels.
Comparable sales, that is sales in warehouses open for at least a year,
trended downward in fiscal 1993 -- from a positive 6% annual rate during fiscal
1992, to a negative 3% annual rate during fiscal 1993. The declining 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 15% and 14% of
net sales in fiscal 1993 and 1992, respectively.
Membership fees and other revenue increased 12% from $276,998, or 2.00% of
net sales, in fiscal 1992 to $309,129, or 2.04% of net sales in fiscal 1993.
This increase reflects a continued strong membership base at existing
warehouses, membership signups at the thirty-seven new warehouses and annualized
effect of membership fee increases in certain markets implemented in fiscal
1992.
Gross margin (defined as net sales minus merchandise costs) increased 12%
from $1,254,917, or 9.08% of net sales in fiscal 1992 to $1,403,532, or 9.26% of
net sales in fiscal 1993. The increased gross margin reflects improved shrinkage
control and improved buying and distribution techniques afforded by the
Company's increased sales volume, as well as increased levels of sales from
ancillary businesses (pharmacy, one-hour photo, print shop, optical and food
services), which carry a higher than average gross margin. The gross margin
figures reflect accounting for merchandise inventory costs on the last-in,
first-out (LIFO) method. For fiscal 1993 there was a $5,350 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 $300 LIFO provision in fiscal 1992.
Selling, general and administrative expenses as a percent of net sales
increased from 8.17% during fiscal 1992 to 8.67% during fiscal 1993, reflecting
a combination of comparable unit sales decreases in the 170 warehouses in
operation during both fiscal periods; higher expense ratios at the 37 units
opened during fiscal 1993 (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.
20
Preopening expenses totaled $25,595 or 0.19% of net sales during fiscal 1992
and $28,172 or 0.19% of net sales during fiscal 1993. During fiscal 1993, the
Company opened 37 new warehouses. The Company opened 31 new warehouses during
fiscal 1992.
During fiscal 1993, the Company announced and closed four warehouses and
completed the closing and relocation of three warehouses announced in fiscal
1992. The costs associated with closing the four warehouses announced in fiscal
1993 will be approximately $5,000, or $.01 per share (fully diluted), and this
amount was recognized as anticipated warehouse closing costs in the fourth
quarter of fiscal 1993. This compares to $2,000 in fiscal 1992, when the Company
announced the closing of two warehouses, relocated one warehouse and announced
the planned relocation of another warehouse.
Interest expense totaled $35,525 in fiscal 1992 and $46,116 in fiscal 1993.
In fiscal 1992 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. Fiscal 1993 includes a full year of interest expense on the $300,000
5 3/4% convertible subordinated debentures which accounted for the increase in
interest expense compared to fiscal 1992.
Interest income and other totaled $28,958 in fiscal 1992, and $17,750 in
fiscal 1993. This decrease was primarily due to lower average investment
balances and lower interest rates.
The effective income tax rate on earnings in fiscal 1993 was 39.7%, compared
to 39.5% 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 1993 offset by changes in state and foreign effective rates.
DISCONTINUED OPERATIONS
Discontinued real estate operations (net of operating expenses and taxes)
includes the results of income producing properties as well as gains (losses) on
sales of property. Income from discontinued real estate operations, net of
income taxes, increased 5% from $19,385 or $0.08 per share in fiscal 1992 to
$20,404 or $0.08 per share in fiscal 1993. The increase primarily represents
nonrecurring gains recognized on sale of properties of $21,500 in fiscal 1993 as
compared to $15,600 in fiscal 1992.
RECENT SALES RESULTS
PriceCostco's net sales for the eight-week period ended October 23, 1994
were approximately $2,520,000 an increase of 11% from approximately $2,280,000
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 one 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. PriceCostco does not
expect to make significant investments in non-club real estate in the future.
Additional capital will be required for international expansion through
investments in foreign subsidiaries and joint ventures.
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 commercial paper program were used to finance additions to property,
equipment for warehouse clubs and related operations of $475,000 and net
inventory investment (merchandise inventories less accounts payable) of $66,000
and other investing activities related primarily to non-club real estate
investments and investments in foreign joint ventures, which together totaled
$125,000.
Expansion plans for the United States and Canada during fiscal 1995 are to
open 30-35 new warehouse clubs. The Company also expects to continue expansion
of its international operations.
21
The Company opened two warehouses in the United Kingdom through a 60%-owned
subsidiary, with a third location due to open in June, 1995. In October 1994,
under a licensing agreement with PriceCostco, a Price Club opened in Seoul,
Korea. Other markets are being assessed, particularly in the Pacific Rim. As a
result of the Exchange Transaction, the Company's 50% ownership interest in the
Mexican joint venture was transferred to Mexico Clubs in which the Company owns
a 49% interest. See "Part I -- Business -- Description of the Exchange
Transaction." As of August 28, 1994, there were 8 Price Clubs operating in
Mexico through such joint venture. As of October 31, 1994, there are 10 Price
Clubs operating in Mexico through such joint venture with one more scheduled to
open prior to December 31, 1994.
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 $500,000 to $600,000 during
fiscal 1995 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $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, cash
equivalents and short-term investments, which totaled $63,000 at August 28,
1994; short-term borrowings under revolving credit facilities and/or commercial
paper facilities; issuance of long-term debt; and other financing sources as
required.
The Company has a domestic multiple option loan facility with a group of 14
banks which provides for borrowings of up to $500,000 or for standby support for
a $500,000 commercial paper program. Of this amount, $250,000 expires on January
30, 1995, and $250,000 expires on January 30, 1998. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
At August 28, 1994, in the amount outstanding under the Company's commercial
paper program was $149,340. The Company expects to renew the $250,000 portion of
the loan facility expiring on January 30, 1995, at substantially the same terms.
In addition, the Company's wholly-owned Canadian subsidiary has a $65,800
line of credit with a group of three Canadian banks of which $29,200 expires on
December 1, 1994 (the short-term portion) and $36,600 expires in various amounts
through December 1, 1996 (the long-term portion). The interest rate on
borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At
August 28, 1994, no amounts were outstanding under these programs. The Company
expects to renew the $29,200 short-term portion of the line of credit expiring
on December 1, 1994, at substantially the same terms.
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $193,000. The outstanding
commitments under these facilities at August 28, 1994 was approximately
$118,000, including approximately $53,000 in standby letters for workers'
compensation requirements.
Due to rapid inventory turnover, the Company's operations provide a higher
level of supplier trade payables than generally encountered in other forms of
retailing. When combined with other current liabilities, the resulting amount
typically approaches the current assets needed to operate the business (e.g.,
merchandise inventories, accounts receivable and other current assets). At
August 28, 1994, the working capital (deficit) totaled ($113,000) compared to
working capital of $127,000 at August 29, 1993. This change is primarily related
to a reduction in cash and cash equivalents of $67,000, a decrease in short-term
investments and restricted cash of $81,000 and an increase in notes payable of
$126,000 offset by other increases of $34,000, as working capital was used to
finance expansion and merger expenses during fiscal 1994.
In fiscal 1992, cash provided from operations was $296,000. These funds
combined with proceeds from issuance of $300,000 5 3/4% convertible subordinated
debentures in May 1992 and approximately $144,000 generated from the sale of
certain properties were used to finance additions to property and
22
equipment for warehouse clubs and related operations of $533,000; other
investing activities related primarily to non-club real estate development, and
investment in foreign joint ventures, which together totaled $83,000.
ITEM 8 -- FINANCIAL STATEMENTS
The following financial statements of PriceCostco are as follows:
Report of Independent Public Accountants............................................... 29
Consolidated Balance Sheets, as of August 28, 1994 and August 29, 1993................. 30
Consolidated Statements of Operations, for the 52 weeks ended August 28, 1994, August
29, 1993, and August 30, 1992......................................................... 31
Consolidated Statements of Stockholders' Equity, for the 52 weeks ended August 28,
1994, August 29, 1993, and August 30, 1992............................................ 32
Consolidated Statements of Cash Flows, for the 52 weeks ended August 28, 1994, August
29, 1993, and August 30, 1992......................................................... 33
Notes to Consolidated Financial Statements............................................. 34
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 January 27, 1995, 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 January 27, 1995, 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 January 27, 1995, 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 January 27, 1995, to be filed with the Commission pursuant to Regulation 14A.
23
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 Statements Schedules:
Report of Independent Public Accountants........................................... 54
Schedule I Marketable Securities -- Other Investments........................... 55
Schedule II Amounts Receivable from Related Parties and Underwriters, Promoters,
and Employees other than Related Parties............................ 56
Schedule V Property, Plant and Equipment........................................ 57
Schedule VI Accumulated Depreciation, Depletion and Amortization of Property,
Plant and Equipment................................................. 58
Schedule IX Short-term Borrowings................................................ 59
(b) Current Report on Form 8-K filed on August 5, 1994.
3. Exhibits
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 page 22 for listing of cross
reference documents).
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.
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) Specimen of 5 1/2% Convertible Subordinated Debenture. (1)
4(a)(2) Form of 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) Specimen of 6 3/4% Convertible Subordinated Debenture. (2)
4(b)(2) Form of 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)
24
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(b)(5) Notice and offer to purchase by PriceCostco, Inc. and The Price Company to First
Interstate Bank of California, as trustee and Holders of 6 3/4% Convertible
Subordinated Debentures of The Price Company. (6)
4(b)(6) Incorporated by reference in Form 8-A filed with respect to the Registration
Statement of the Company's 6 3/4% Convertible Subordinated Debentures dated
December 21, 1993.
4(b)(7) Incorporated by reference in Form 15 with respect to the notice of termination
of the Registration of Price's 6 3/4% Convertible Subordinated Debentures dated
January 3, 1994.
4(c)(1) Specimen of 5 3/4% Convertible Subordinated Debenture. (5)
4(c)(2) Copy of the form of Indenture dated as of May 15, 1992 between Costco and First
Trust National Association, as Trustee. (5)
4(c)(3) Copy of First Supplemental Indenture dated as of October 21, 1993 between
Costco, PriceCostco and First Trust National Association, as Trustee. (8)
4(c)(4) Incorporated by reference in Form 15 with respect to the notice of termination
of the registration of Costco's 5 3/4% Convertible Subordinated Debentures
dated December 21, 1993.
4(d) Form of Price/Costco, Inc. Stock Certificate (4)
10(a) The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option Plan. (4)
10(b) Form of Indemnification Agreement
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)
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)
23.1 Consent of Arthur Andersen LLP
23.2 Report of Ernst & Young LLP on The Price Company Fiscal 1993 Annual Report.
- ------------------------
(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.
25
(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.
26
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 16, 1994
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.
By /s/ JAMES D. SINEGAL November 16, 1994
----------------------------------------
James D. Sinegal
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
By /s/ ROBERT E. PRICE November 16, 1994
----------------------------------------
Robert E. Price
CHAIRMAN OF THE BOARD
By /s/ JEFFREY H. BROTMAN November 16, 1994
----------------------------------------
Jeffrey H. Brotman
VICE CHAIRMAN OF THE BOARD
By /s/ RICHARD A. GALANTI November 16, 1994
----------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
By November , 1994
----------------------------------------
Daniel Bernard
DIRECTOR
By /s/ RICHARD D. DICERCHIO November 16, 1994
----------------------------------------
Richard D. DiCerchio
EXECUTIVE VICE PRESIDENT
AND DIRECTOR
27
By /s/ HAMILTON E. JAMES November 16, 1994
----------------------------------------
Hamilton E. James
DIRECTOR
By /s/ RICHARD M. LIBENSON November 16, 1994
----------------------------------------
Richard M. Libenson
DIRECTOR
By /s/ JOHN W. MEISENBACH November 16, 1994
----------------------------------------
John W. Meisenbach
DIRECTOR
By /s/ DUANE A. NELLES November 16, 1994
----------------------------------------
Duane A. Nelles
DIRECTOR
By /s/ PAUL A. PETERSON November 16, 1994
----------------------------------------
Paul A. Peterson
DIRECTOR
By /s/ J. PAUL KINLOCH November 16, 1994
----------------------------------------
J. Paul Kinloch
DIRECTOR
By /s/ MITCHELL G. LYNN November 16, 1994
----------------------------------------
Mitchell G. Lynn
PRESIDENT OF THE PRICE COMPANY AND DIRECTOR
28
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
August 28, 1994 and August 29, 1993, and the related statements of operations,
stockholders' equity and cash flows for the 52-week periods ended August 28,
1994, August 29, 1993 and August 30, 1992. 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 assets of 52% of the
consolidated totals as of August 29, 1993 and total revenues of 51% and 53% of
the consolidated totals for the 52-week periods ended August 29, 1993 and August
30, 1992, respectively. Those statements were audited by other auditors whose
report thereon has been furnished to us and our opinion expressed herein,
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 August 28,
1994 and August 29, 1993, and the results of its operations and its cash flows
for the 52-week periods ended August 28, 1994, August 29, 1993 and August 30,
1992 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Seattle, Washington
November 14, 1994
29
PRICE/COSTCO, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
AUGUST 28, AUGUST 29,
1994 1993
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents...................................................... $ 53,638 $ 120,227
Short-term investments and restricted cash..................................... 9,268 90,116
Receivables, net............................................................... 130,278 114,828
Merchandise inventories........................................................ 1,260,476 993,729
Deferred income taxes.......................................................... 54,717 34,901
Other current assets........................................................... 25,921 35,233
-------------- --------------
Total current assets......................................................... 1,534,298 1,389,034
-------------- --------------
PROPERTY AND EQUIPMENT
Land, land rights, and land improvements....................................... 878,858 862,407
Buildings and leasehold improvements........................................... 1,091,073 880,113
Equipment and fixtures......................................................... 523,310 433,502
Construction in progress....................................................... 78,264 116,291
-------------- --------------
2,571,505 2,292,313
Less -- accumulated depreciation and amortization.............................. (425,109) (325,712)
-------------- --------------
Net property and equipment................................................... 2,146,396 1,966,601
-------------- --------------
OTHER ASSETS..................................................................... 110,654 109,282
INVESTMENT IN PRICE CLUB MEXICO JOINT VENTURE.................................... 67,226 24,072
DISCONTINUED OPERATIONS -- NET ASSETS............................................ 377,085 441,810
-------------- --------------
$ 4,235,659 $ 3,930,799
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding, less cash on deposit.................................. $ 6,804 $ 18,361
Notes payable.................................................................. 149,340 23,093
Accounts payable............................................................... 1,073,326 872,851
Accrued salaries and benefits.................................................. 207,570 178,397
Accrued sales and other taxes.................................................. 81,736 77,784
Income taxes payable........................................................... 12,600 1,785
Other current liabilities...................................................... 115,931 89,451
-------------- --------------
Total current liabilities.................................................... 1,647,307 1,261,722
LONG-TERM DEBT................................................................... 795,492 812,576
DEFERRED INCOME TAXES............................................................ 65,679 51,540
OTHER LIABILITIES................................................................ 7,442 8,233
-------------- --------------
Total liabilities............................................................ 2,515,920 2,134,071
-------------- --------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST................................................................ 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;
217,795,000 and 217,074,000 shares issued and outstanding..................... 2,178 2,171
Additional paid-in capital..................................................... 582,148 571,268
Accumulated foreign currency translation....................................... (42,580) (32,293)
Retained earnings.............................................................. 1,143,214 1,255,582
-------------- --------------
Total stockholders' equity................................................... 1,684,960 1,796,728
-------------- --------------
$ 4,235,659 $ 3,930,799
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these balance sheets.
30
PRICE/COSTCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
AUGUST 28, AUGUST 29, AUGUST 30,
1994 1993 1992
-------------- -------------- --------------
REVENUE
Net sales...................................................... $ 16,160,911 $ 15,154,685 $ 13,820,380
Membership fees and other...................................... 319,732 309,129 276,998
-------------- -------------- --------------
Total revenue................................................ 16,480,643 15,463,814 14,097,378
OPERATING EXPENSES
Merchandise costs.............................................. 14,662,891 13,751,153 12,565,463
Selling, general and administrative............................ 1,425,549 1,314,660 1,128,898
Preopening expenses............................................ 24,564 28,172 25,595
Provision for estimated warehouse closing costs................ 7,500 5,000 2,000
-------------- -------------- --------------
Operating income............................................. 360,139 364,829 375,422
OTHER INCOME (EXPENSE)
Interest expense............................................... (50,472) (46,116) (35,525)
Interest income and other...................................... 13,888 17,750 28,958
Provision for merger and restructuring expenses................ (120,000) -- --
-------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME
TAXES........................................................... 203,555 336,463 368,855
Provision for income taxes..................................... 92,657 133,620 145,833
-------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS................................ 110,898 202,843 223,022
DISCONTINUED OPERATIONS:
Income (loss), net of tax...................................... (40,766) 20,404 19,385
Loss on disposal............................................... (182,500) -- --
-------------- -------------- --------------
NET INCOME (LOSS)................................................ $ (112,368) $ 223,247 $ 242,407
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE --
PRIMARY:
Continuing operations.......................................... $ .51 $ .92 $ .98
Discontinued operations:
Income (loss), net of tax.................................... (.19) .08 .08
Loss on disposal............................................. (.83) -- --
-------------- -------------- --------------
Net income (loss).............................................. $ (.51) $ 1.00 $ 1.06
-------------- -------------- --------------
-------------- -------------- --------------
FULLY DILUTED:
Continuing operations.......................................... $ .51 $ .92 $ .98
Discontinued operations:
Income (loss), net of tax.................................... (.19) .08 .08
Loss on disposal............................................. (.83) -- --
-------------- -------------- --------------
Net income (loss).............................................. $ (.51) $ 1.00 $ 1.06
-------------- -------------- --------------
-------------- -------------- --------------
The accompanying notes are an integral part of these statements.
31
PRICE/COSTCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE 52 WEEKS ENDED AUGUST 28, 1994, AUGUST 29, 1993, AND AUGUST 30, 1992
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL FOREIGN
---------------------- PAID-IN CURRENCY RETAINED
SHARES AMOUNT CAPITAL TRANSLATION EARNINGS TOTAL
--------- ----------- ----------- ------------ ---------- ----------
BALANCE AT SEPTEMBER 1, 1991............... 219,612 $ 2,196 $ 632,094 $ 5,485 $ 789,928 $1,429,703
Stock options and warrants exercised
including income tax benefits......... 2,210 22 25,828 -- -- 25,850
Shares repurchased..................... (5,802) (58) (93,560) -- -- (93,618)
Net income............................. -- -- -- -- 242,407 242,407
Foreign currency translation
adjustment............................ -- -- -- (10,399) -- (10,399)
--------- ----------- ----------- ------------ ---------- ----------
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
--------- ----------- ----------- ------------ ---------- ----------
--------- ----------- ----------- ------------ ---------- ----------
The accompanying notes are an integral part of these statements.
32
PRICE/COSTCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 28, AUGUST 29, AUGUST 30,
1994 1993 1992
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................................... $ (112,368) $ 223,247 $ 242,407
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................... 143,663 112,134 89,300
Net gain on sale of property and equipment and other.................... (2,192) (18,128) (15,324)
Provision for asset impairments......................................... 90,200 -- --
Loss on disposal of discontinued operations............................. 182,500 -- --
Increase (decrease) in deferred income taxes............................ (41,623) 10,954 1,135
Change in receivables, other current assets, accrued expenses and other
long-term liabilities.................................................. 56,757 (25,655) 59,502
Increase in merchandise inventories..................................... (271,332) (137,855) (150,945)
Increase in accounts payable............................................ 205,213 136,142 47,044
Other................................................................... (3,013) (5,031) (6,129)
----------- ----------- -----------
Total adjustments..................................................... 360,173 72,561 24,583
----------- ----------- -----------
Net cash provided by operating activities............................. 247,805 295,808 266,990
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment..................................... (474,553) (533,025) (635,817)
Additions to non-club real estate investments........................... (85,628) (60,778) (76,638)
Proceeds from the sale of non-club real estate investments and property
and equipment.......................................................... 67,867 143,548 140,707
Investment in foreign joint ventures.................................... (39,795) (21,905) (2,690)
Decrease in short-term investments and restricted cash.................. 80,848 31,018 183,093
Increase in other assets and other...................................... (8,416) (8,947) (16,655)
----------- ----------- -----------
Net cash used in investing activities................................. (459,677) (450,089) (408,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from notes payable........................................... 130,344 31,845 21,018
Repayments of notes payable and long-term debt.......................... (29,937) (10,450) (7,191)
Net proceeds from issuance of long-term debt............................ 13,805 -- 297,000
Changes in bank overdraft............................................... (15,477) (2,757) 7,856
Proceeds from minority partners......................................... 36,557 -- --
Exercise of stock options and warrants, including income tax benefit.... 11,383 13,451 25,850
Repurchases of common stock............................................. (496) (6,534) (93,618)
----------- ----------- -----------
Net cash provided by financing activities............................. 146,179 25,555 250,915
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................... (896) (5,039) (1,277)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.................. (66,589) (133,765) 108,628
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR............................... 120,227 253,992 145,364
----------- ----------- -----------
CASH AND CASH EQUIVALENTS END OF YEAR..................................... $ 53,638 $ 120,227 $ 253,992
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized).................................... $ 50,787 $ 44,944 $ 29,259
Income taxes............................................................ $ 97,685 $ 149,150 $ 143,937
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Owned property was transferred or invested as follows:
Property and equipment.................................................. $ (127,055) $ (68,758) $ 7,537
Discontinued operations -- net assets................................... 127,055 72,093 1,807
Other assets............................................................ -- (3,335) (9,344)
The accompanying notes are an integral part of these statements.
33
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.
As described more fully in "Note 3 -- Spin-off of Price Enterprises, Inc.
and Discontinued Operations" the Company has treated the spin-off of its real
estate operations as discontinued operations in the fourth quarter of fiscal
1994.
The Company's investment in the Mexico joint venture and in real estate
joint ventures that are less than majority owned are accounted for under the
equity method.
BUSINESS
The Company has operated in two reporting business segments, a cash and
carry merchandising operation and as of July 1994 has discontinued its non-club
real estate operations. The Company reports on a 52/53 week basis and ends on
the Sunday nearest August 31st. Fiscal years 1994, 1993 and 1992 were each 52
weeks.
CASH AND CASH EQUIVALENTS
The Company considers all investments in highly liquid debt instruments
maturing within 90 days when purchased 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 $6,650 at August 28, 1994, $9,250 at
August 29, 1993 and $14,600 at August 30, 1992.
AUGUST 28, AUGUST 29,
1994 1993
------------- -----------
Merchandise inventories consist of:
United States (primarily LIFO).................................. $ 1,089,924 $ 869,445
Foreign (FIFO).................................................. 170,552 124,284
------------- -----------
Total......................................................... $ 1,260,476 $ 993,729
------------- -----------
------------- -----------
34
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
Current receivables consist of vendor rebates and other miscellaneous
amounts due to the Company, and are net of allowance for doubtful accounts of
$3,045 at August 28, 1994 and $1,567 at August 29, 1993.
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 $7,170 in fiscal 1994, $9,483 in fiscal
1993 and $8,487 in fiscal 1992.
GOODWILL
Goodwill included in other assets totaled $38,761 at August 28, 1994 and
$41,725 at August 29, 1993 resulted from certain previous business combinations.
Goodwill is being amortized over 5 to 40 years using the straight-line method.
Accumulated amortization was $5,986 at August 28, 1994 and $5,575 at August 29,
1993.
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 1993 and 1992, 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 1994, 1993 and 1992 were as follows (in thousands):
1994 1993 1992
--------- --------- ---------
Primary.................................................... 219,332 227,331 232,276
Fully diluted.............................................. 219,334 240,162 245,090
35
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, 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 and 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.
RECLASSIFICATIONS
Certain reclassifications of expenses between merchandise costs and selling,
general and administrative expenses have been reflected in the financial
statements in order to conform the presentations of the combined entities.
NOTE 2 -- MERGER OF PRICE AND COSTCO
On October 21, 1993, the shareholders of both Price and Costco approved the
mergers of Price and Costco into subsidiaries of PriceCostco (the Merger).
Pursuant to the Merger, Price and Costco became subsidiaries of PriceCostco.
Shareholders of Price received 2.13 shares of PriceCostco common stock for each
share of Price common stock and shareholders of Costco received one share of
PriceCostco common stock for each share of Costco.
The Merger qualified as a "pooling-of-interests" for accounting and
financial reporting purposes. The pooling-of-interests method of accounting is
intended to present as a single interest two or more common shareholder
interests which were previously independent. Consequently, the historical
financial statements for periods prior to the consummation of the combination
were restated as though the companies had been combined. The restated financial
statements were adjusted to conform the accounting policies of the separate
companies.
All fees and expenses related to the Merger and to the consolidation and
restructuring of the combined companies were expensed as required under the
pooling-of-interests accounting method. In the first quarter of fiscal 1994, the
Company recorded a provision for merger and restructuring costs of $120,000
pre-tax ($80,000 after tax) related to the Merger.
36
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, including amounts expended in Fiscal 1994 and the remaining
accrual related to completing the merger and restructuring effort at August
28, 1994, are as follows:
FISCAL 1994
AMOUNTS ESTIMATE TO
EXPENDED COMPLETE
----------- -----------
Direct transaction expenses including investment banking, legal, accounting,
printing, filing and other professional fees................................. $ 24,548 $ --
Cost of closing eight operating warehouses including property write-downs,
severance, future lease costs, and other closing expenses; write-downs of
abandoned warehouse projects and restructuring of redundant international
expansion efforts............................................................ 24,948 --
Costs of consolidating central administrative functions including information
systems, accounting, merchandising and human resources and costs associated
with restructuring regional and warehouse support activities including
merchandise re-alignment and distribution, all of which is expected to be
completed in fiscal 1995..................................................... 30,178 8,822
Costs of converting management information systems, primarily merchandising,
operating, and membership systems in fiscal 1994 and planned conversion of
payroll, sales audit, and other systems in fiscal 1995....................... 13,904 7,096
Other expenses................................................................ 9,224 1,280
----------- -----------
Total..................................................................... $ 102,802 $ 17,198
----------- -----------
----------- -----------
37
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- MERGER OF PRICE AND COSTCO (CONTINUED)
The following summarizes amounts reported by Price and Costco prior to the
Merger for fiscal 1994, 1993 and 1992.
CONTINUING OPERATIONS
---------------------------------------- INCOME (LOSS) FROM
MEMBERSHIP DISCONTINUED
NET SALES FEES AND OTHER INCOME OPERATIONS
----------- -------------- ---------- ------------------
Fiscal 1994
Price (8 weeks prior to the Merger)....................... $ 1,092,891 $ 28,525 $ 10,145 $ 3,092
Costco (8 weeks prior to the Merger)...................... 1,204,765 23,818 9,301 --
PriceCostco (44 weeks after the Merger)................... 13,863,255 267,389 91,452 (43,858)
----------- -------------- ---------- ------------------
Combined.................................................. $16,160,911 $319,732 $ 110,898(a) $ (40,766)(b)
----------- -------------- ---------- ------------------
----------- -------------- ---------- ------------------
Fiscal 1993
Price..................................................... $ 7,648,470 $165,960 $ 93,410 $ 20,404
Costco.................................................... 7,506,215 143,169 109,433 --
----------- -------------- ---------- ------------------
Combined.................................................. $15,154,685 $309,129 $ 202,843 $ 20,404
----------- -------------- ---------- ------------------
----------- -------------- ---------- ------------------
Fiscal 1992
Price..................................................... $ 7,320,187 $156,428 $ 109,727 $ 19,385
Costco.................................................... 6,500,193 120,570 113,295 --
----------- -------------- ---------- ------------------
Combined.................................................. $13,820,380 $276,998 $ 223,022 $ 19,385
----------- -------------- ---------- ------------------
----------- -------------- ---------- ------------------
- ------------------------
(a) Income from continuing operations in fiscal 1994 includes the provision for
merger and restructuring expenses of $120,000 pre-tax ($80,000 after tax).
(b) Loss from discontinued operations in fiscal 1994 includes a provision for
asset impairments of $80,500 pre-tax ($47,500 after-tax) related to the
change in accounting estimates (see "Note 3 -- Spin-off of Price
Enterprises, Inc. and Discontinued Operations").
NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS
SPIN-OFF OF PRICE ENTERPRISES, INC.
On July 28, 1994, PriceCostco entered into an Agreement of Transfer and Plan
of Exchange (as amended and restated, the Transfer and Exchange Agreement) with
Price Enterprises, Inc. (Price Enterprises). Price Enterprises is an indirect,
wholly-owned subsidiary of PriceCostco, formed in July 1994. The transactions
contemplated by the Transfer and Exchange Agreement are referred to herein as
the "Exchange Transaction."
Pursuant to the Transfer and Exchange Agreement, PriceCostco will offer to
exchange one share of Price Enterprises Common Stock for each share of
PriceCostco Common Stock, up to a maximum of 27 million shares of Price
Enterprises Common Stock (the Exchange Offer). If more than 27 million shares of
PriceCostco Common Stock are validly tendered and not withdrawn in the Exchange
Offer prior to the expiration thereof, then PriceCostco will accept 27 million
shares on a pro rata basis and shares of Price Enterprises Common Stock will be
exchanged therefor. If the number of shares of PriceCostco Common Stock validly
tendered in the Exchange Offer by holders of PriceCostco Common Stock is less
than 21.6 million, PriceCostco will accept such validly tendered shares for
exchange and will distribute the remaining shares of Price Enterprises Common
Stock pro rata to PriceCostco
38
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)
stockholders. If the number of shares of PriceCostco Common Stock validly
tendered in the Exchange Offer by holders of PriceCostco Common Stock is greater
than 21.6 million, but less than 27 million, PriceCostco will accept such
validly tendered shares for exchange and will, at its option, either (i)
distribute the remaining shares of Price Enterprises Common Stock pro rata to
PriceCostco stockholders or (ii) sell such remaining shares to Price Enterprises
in exchange for a promissory note.
The following real estate related assets have been or will be transferred to
Price Enterprises:
- Substantially all of the real estate properties which historically formed
the non-club real estate segment of PriceCostco.
- Four existing Price Club warehouses ("Warehouse Properties") which are
adjacent to existing non-club real estate properties which are being
leased back to PriceCostco effective August 29, 1994, at initial
collective annual rentals of approximately $8,600.
- Notes receivable from various municipalities and agencies ("City Notes").
- Note receivable in the principal amount of $41,000 made by Atlas Hotels,
Inc., secured by a hotel and convention center property located in San
Diego, California ("Atlas Note").
In addition, PriceCostco agreed to transfer to Price Enterprises 51% of the
outstanding capital stock of two newly formed, wholly owned subsidiaries of the
Company: Price Quest, Inc. (Price Quest) and Price Global Trading, Inc. (Price
Global), Price and Price Enterprises also own 49% and 51% interests,
respectively, in Mexico Clubs, L.L.C., a limited liability company (Mexico
Clubs, which together with Price Quest and Price Global comprise the Subsidiary
Corporations).
Mexico Clubs will own the Company's 50% interest in Price Club de Mexico and
affiliates (Price Club Mexico), a 50-50 joint venture with Controladora
Comercial Mexicana S.A. de C.V., which develops, owns and operates Price Clubs
in Mexico. The investment in Price Club Mexico is accounted for under the equity
method. At August 28, 1994, eight Price Clubs were in operation in Mexico. The
Company owns a 49% interest in Mexico Clubs.
Price Quest will continue to operate the Quest interactive electronic
shopping business of PriceCostco. The Quest business includes electronic
shopping through kiosks located in certain PriceCostco club warehouses; Price
Club Travel, which offers discount airline tickets and travel packages to
PriceCostco members; Price Club Realty, a real estate brokerage business for
PriceCostco members; and the Price Club automobile referral/advertising program,
which publishes advertisements for automobile dealers who provide discount
purchasing programs to PriceCostco members in the vicinity of certain
PriceCostco warehouse clubs. The Company owns 49% of the capital stock of Price
Quest.
Price Global has the rights to develop club businesses in certain
geographical areas specified in the Transfer and Exchange Agreement and owns
100% of the outstanding shares of Club Merchandising, Inc. (CMI), which was
acquired by the Company in March 1992. The Company owns 49% of the capital stock
of Price Global.
For purposes of governing the ongoing relationships between PriceCostco,
Price Enterprises, and the Subsidiary Corporations, PriceCostco and Price, on
the one hand, and Price Enterprises and the Subsidiary Corporations, on the
other, have entered into operating agreements. PriceCostco and Price, on the one
hand, and Price Enterprises and each of Price Global and Price Quest, on the
other, have entered into stockholders agreements to clarify certain rights and
obligation of PriceCostco and Price Enterprises as stockholders of Price Global
and Price Quest. Price and Price Enterprises have
39
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)
entered into a Limited Liability Company Agreement with respect to Mexico Clubs
that sets forth the rights and obligations of each of Price and Price
Enterprises with respect to its membership interest in Mexico Clubs. PriceCostco
and Price Enterprises have entered into an unsecured revolving credit agreement
under which PriceCostco has agreed to advance Price Enterprises up to a maximum
principal amount of $85 million (reduced by the net proceeds from the sale of
certain commercial properties).
DISCONTINUED OPERATIONS
Historically, the Company has treated non-club real estate investments as a
separate reportable business segment. The primary assets generating operating
income for the segment have been non-club real estate properties, consisting of
property owned directly and property owned by real estate joint venture
partnerships in which the Company has a controlling interest. Real estate joint
ventures relate to real estate partnerships that are less than majority owned.
In fiscal 1994, the Atlas Note was purchased and the related interest income has
been included in the non-club real estate segment.
Additionally, the Warehouse Properties, and City Notes transferred to Price
Enterprises as of August 28, 1994 have been included in the net assets of the
discontinued operations as of August 28, 1994 and August 29, 1993, in the
accompanying consolidated balance sheets. 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 Subsidiary Corporations 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 sheets at August 28, 1994 and August 29, 1993 consist of
the following:
1994 1993
------------ -----------
Non-Club Real Estate properties, net of accumulated depreciation............. $ 351,958 $ 323,922
Real Estate joint ventures................................................... -- 10,569
Warehouse Properties, net of accumulated depreciation........................ 91,415 65,081
City and Atlas Notes......................................................... 73,023 49,638
Other assets................................................................. 8,672 5,281
Deferred tax assets (liabilities)............................................ 23,282 (12,681)
Liabilities.................................................................. (4,015) --
------------ -----------
544,335 441,810
Less: Reserve for estimated loss on disposal -- see "Estimated loss" below... (167,250) --
------------ -----------
Discontinued operations -- net assets........................................ $ 377,085 $ 441,810
------------ -----------
------------ -----------
40
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)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Components of net income (loss) from discontinued operations for fiscal
1994, 1993 and 1992 were as follows:
1994 1993 1992
---------- ---------- ----------
Real estate rentals............................................... $ 29,753 $ 22,802 $ 27,263
Operating expenses................................................ (17,158) (10,457) (10,803)
Gains on sale of non-club real estate properties.................. 6,135 21,500 15,600
Provision for asset impairments (including a change in estimate
related to the Exchange Transaction)............................. (90,200) -- --
---------- ---------- ----------
Operating income (loss)......................................... (71,470) 33,845 32,060
Interest income................................................... 2,319 -- --
Provision (benefit) for income taxes.............................. (28,385) 13,441 12,675
---------- ---------- ----------
Net income (loss)............................................... $ (40,766) $ 20,404 $ 19,385
---------- ---------- ----------
---------- ---------- ----------
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 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 believes 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 Enterprise 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. (REIT). On October 1, 1993, the Company sold a single shopping center
and adjacent Price Club (which is being leased back to the Company) for $28,200.
The Company recorded a $4,210 pre-tax gain in connection with this sale.
41
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)
During fiscal 1993, the Company entered into two transactions with the 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.
During fiscal 1992, the Company entered into two transactions with the REIT:
(a) On December 1, 1991 the Company entered into a sale and leaseback
transaction, under which four Price Clubs were sold to the REIT for $26,700
and leased back for annual rentals of $2,470, increasing $27 each year. The
master lease has an initial term of 15 years with seven five-year renewal
options. Additionally, the Company sold a 50.4% interest in five shopping
centers, four of which are adjacent to the Price Clubs involved in the
sale-leaseback. The Company agreed, for a specified period, to subordinate
its portion of the operational cash flow of the joint venture to allow the
REIT shareholders to receive a specified return on their investment (9% the
first year, increasing to 9.5% in year five). The Company recorded a pretax
gain of $4,400 in connection with this sale.
(b) On April 29, 1992, the Company sold two shopping centers and one
Price Club adjacent to one of the shopping centers for $62,500. The Price
Club is being leased back from the REIT for annual rentals of $370,
increasing $4 per year, with an initial term of 15 years and seven five-year
renewal options. The Company recorded a pre-tax gain of $11,200 in
connection with this sale.
For the real estate transactions referred to above, no gains were recognized
for the portion of the sales involving Price Club warehouses which are being
leased back.
ESTIMATED LOSS ON DISPOSAL AND SUBSEQUENT ADJUSTMENT
In the fourth quarter of fiscal 1994, the Company recorded an estimated loss
on disposal of its discontinued operations (the non-club real estate segment) as
a result of entering into the Transfer and Exchange Agreement. While the
Exchange Transaction is not expected to be completed until December 1994, the
Company determined that the Exchange Transaction will, in all likelihood, result
in a significant loss for financial reporting purposes and that there is a
reasonable basis for estimating the loss. The actual loss for financial
reporting purposes will be determined following consummation of the Exchange
Transaction. Such loss will be the product of: (a) the difference between the
book value per share of the assets transferred to Price Enterprises (at
historical cost), and the fair market value per share; and (b) the actual number
of shares exchanged. The loss also includes the direct expenses related to the
Exchange Transaction. For purposes of recording such estimated loss, the Company
assumed that (i) the Exchange Offer would be fully subscribed, (ii) a per share
price of Price Enterprises Common Stock of $15.25 (the closing sales price of
PriceCostco Common Stock on October 24, 1994) and (iii) direct expenses and
other costs related to the Exchange Transaction of approximately $15,250.
42
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)
The following table explains how the estimated loss was computed:
Book value of net assets transferred to Price Enterprises....... $ 579,000
Estimated market value of Price Enterprises stock $15.25 x 27
million shares................................................. (411,750)
---------
167,250
Transaction and other costs..................................... 15,250
---------
$ 182,500
---------
---------
The book value of the assets transferred to Price Enterprises (approximately
$21 per share of Price Enterprises stock), reflects a provision for asset
impairments of $80,500 recorded as a change in accounting estimate in the fourth
quarter of fiscal 1994.
The approximate $6 per share difference between the $21 book value per share
of Price Enterprises and the assumed per share price of Price Enterprises is
attributable to a combination of factors. These factors include an expectation
that Price Enterprises' stock may trade at a discount from its book value
(although the prices at which shares of Price Enterprises will trade cannot be
predicted).
In making its determination to approve the Exchange Transaction, one of the
factors considered by the Board of Directors of the Company was a range of
illustrative high and low per share values for Price Enterprises and the implied
per share premium in the Exchange Offer based on such illustrative values as
compared to the per share price of PriceCostco common stock at July 14, 1994 of
$14.75 (assuming 27 million shares of Price Enterprises common stock outstanding
and a one-for-one exchange ratio). While believing that some premium to
tendering stockholders is included in the exchange ratio, the Board did not
quantify any such premium, recognizing that it could not quantify any such
premium since the range of prices at which Price Enterprises Common Stock may
trade cannot be predicted. If any such premium could be objectively measured, it
would be accounted for as a cost of the treasury shares to be acquired by the
Company. Since any premium cannot be objectively measured, the Company believes
that it is appropriate in the circumstances to include any premium as part of
the estimated loss on the disposal of the non-club real estate segment,
recognizing that the amount of the loss is subject to revision after the
Exchange Offer closes.
As indicated above, the estimated loss was determined assuming that the
Exchange Offer would be fully subscribed. Any subsequent adjustment to the
estimated loss will be affected by the extent to which the Exchange Offer is
subscribed. If the Exchange Offer is at least 80% subscribed and PriceCostco
elects to sell the unsubscribed shares to Price Enterprises for a note, the loss
on the Transaction will be the same as if it were fully subscribed. Any
unsubscribed shares distributed to stockholders pro rata will be excluded from
the loss determination and accounted for as a dividend. The dividend will be
measured by the book value per share of Price Enterprises shares distributed and
will be is charged directly to retained earnings. Furthermore, to the extent
that the Price Enterprises' fair market value per share differs from the
estimated share price used above, the per share difference times the number of
shares exchanged will be reclassified from the loss on disposal reflected in the
income statement and included in the cost of the Company's treasury shares
acquired. In measuring the actual loss on the Exchange Transaction, PriceCostco
expects to measure the fair market value of Price Enterprises' stock based on
the average closing sales price of Price Enterprises Common Stock during the 20
trading days commencing on the sixth trading day following the closing of the
Exchange Offer. However, other factors may also need to be considered in making
the final determination.
43
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)
If the Exchange Offer is at least 80% subscribed and PriceCostco decides to
sell the unsubscribed shares to Price Enterprises in exchange for a note, the
loss on the Transaction will be the same as if it were fully subscribed.
Otherwise, the actual loss will be reduced by approximately $6 per share. The
actual loss determination will also be affected by the fair market price of
Price Enterprises stock. The fair market value of Price Enterprises stock will
be used to measure the cost per share of each PriceCostco share acquired in the
Exchange Offer. For each dollar per share difference in Price Enterprises' stock
value from the $15.25 amount used for purposes of estimating the loss, the
actual loss will change by one dollar for every share exchanged. An increase in
Price Enterprises' stock value would reduce the amount of the loss, while a
decrease in Price Enterprises' stock value would cause the loss to be greater.
Determination of the actual loss will not affect PriceCostco's pro forma
balance sheet, because any change in the amount of the loss on disposal, as it
is ultimately measured, will result in an offsetting change in stockholders'
equity, either as dividends, as an adjustment to the cost of treasury shares
being acquired, or both.
UNAUDITED PRO FORMA CONDENSED INFORMATION
The following unaudited pro forma condensed balance sheet of PriceCostco as
of August 28, 1994 reflects the unaudited pro forma adjustments of the Exchange
Transaction as if it had occurred on August 28, 1994 regardless of the ultimate
treatment of the estimated loss on disposal as discussed above:
PRO FORMA
HISTORICAL ADJUSTMENTS(A) PRO FORMA
------------- -------------- -------------
ASSETS
Current assets..................................................... $ 1,534,298 $ (2,678) $ 1,531,620
Property and equipment, net........................................ 2,146,396 (4,014) 2,142,382
Discontinued operations -- net assets.............................. 377,085 (377,085) --
Investment in Price Club Mexico.................................... 67,226 (34,285) 32,941
Other assets....................................................... 110,654 2,585 113,239
------------- -------------- -------------
------------- -------------- -------------
Total assets....................................................... $ 4,235,659 $ (415,477) $ 3,820,182
------------- -------------- -------------
------------- -------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities................................................ $ 1,647,307 $ (3,727) $ 1,643,580
Long-term debt..................................................... 795,492 -- 795,492
Deferred income taxes and other.................................... 73,121 -- 73,121
Minority interests................................................. 34,779 -- 34,779
Stockholders' equity............................................... 1,684,960 (411,750) 1,273,210
------------- -------------- -------------
Total liabilities and stockholders equity.......................... $ 4,235,659 $ (415,477) $ 3,820,182
------------- -------------- -------------
------------- -------------- -------------
- ------------------------
(a) The unaudited pro forma adjustments to the condensed balance sheet reflect
the elimination of net assets of Price Enterprises including the
discontinued operations net assets and the net assets of the Subsidiary
Corporations.
Pro forma net income from continuing operations was reduced by $2,580 or
$.01 per share for the net effect of assets transferred in the Exchange
Transaction which were not accounted for as part of discontinued operations.
This net effect was caused by rent expense on the Warehouse Properties, income
on the City Notes, and equity in earnings of Price Club Mexico, which was offset
by the losses on certain merchandising operations.
44
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 -- DEBT
BANK LINES OF CREDIT
The company has a domestic multiple option loan facility with a group of 14
banks which provides for borrowings of up to $500,000 or for standby support for
a $500,000 commercial paper program. Of this amount, $250,000 expires on January
30, 1995, and $250,000 expires on January 30, 1998. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
Notes payable at August 28, 1994, in the accompanying balance sheet consist of
amounts outstanding under the Company's commercial paper program. The Company
expects to renew the $250,000 portion of the loan facility expiring on January
30, 1995, at substantially the same terms.
In addition, the Company's wholly-owned Canadian subsidiary has a $65,800
line of credit with a group of three Canadian banks of which $29,200 expires on
December 1, 1994 (the short-term portion) and $36,600 expires in various amounts
through December 1, 1996 (the long-term portion). The interest rate on
borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At
August 28, 1994, no amounts were outstanding under these programs. The Company
expects to renew the $29,200 short-term portion of the line of credit expiring
on December 1, 1994, at substantially the same terms.
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $193,000. The outstanding
commitments under these facilities at August 28, 1994 were approximately
$118,000 including approximately $53,000 in standby letters for workers'
compensation requirements.
LONG-TERM DEBT
Long-term debt at August 28, 1994 and August 29, 1993 consists of:
1994 1993
----------- -----------
5 3/4% Convertible subordinated debentures due May 15, 2002................... $ 300,000 $ 300,000
6 3/4% Convertible subordinated debentures due March 1, 2001.................. 285,079 287,500
5 1/2% Convertible subordinated debentures due February 28, 2012.............. 179,338 179,338
Notes payable secured by trust deeds on real estate........................... 31,235 39,853
Banker's Acceptances and other................................................ 6,266 10,177
----------- -----------
801,918 816,868
Less current portion (included in other current liabilities).................. 6,426 4,292
----------- -----------
Total long-term debt...................................................... $ 795,492 $ 812,576
----------- -----------
----------- -----------
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.
During the fourth quarter of fiscal 1992, Costco completed an offering of
$300,000 5 3/4% convertible subordinated debentures due 2002, which 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.
In fiscal 1991, Price issued $287,500 6 3/4% convertible subordinated
debentures, which are convertible into shares of PriceCostco common stock at any
time on or before March 1, 2001, unless
45
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 -- DEBT (CONTINUED)
previously redeemed, at a conversion price of $22.54 per share, subject to
adjustment in certain events. The 6 3/4% debentures are unsecured and interest
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. On November 4, 1993 notice was given to the 6 3/4%
convertible debenture holders that their option to redeem the debentures, for
cash equal to the principal amount plus accrued interest, in the event of a
change of control of Price was effective as a result of the Merger and that
holders had until December 6, 1993 to exercise such options. Approximately
$2,421 of debentures were purchased at their face value subsequent to November
21, 1993.
PriceCostco also has outstanding 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 5 1/2% debentures
provide for payments to an annual sinking fund in the amount of 5% of the
original principal amount ($10,000), commencing February 28, 1998, calculated to
retire 70% of the principal amount prior to maturity. During fiscal 1990, the
Company repurchased $20,597 of the debentures for a total cost of $17,507,
resulting in a gain of approximately $2,900 and will apply this purchase to the
initial sinking fund payments. The debentures are unsecured and interest is
payable semiannually on February 28 and August 31.
Due to the Exchange Offer, the possibility exists for a downward adjustment
in the conversion price of each of the debentures. Such adjustment could occur
in the event that (i) less than 21.6 million shares of PriceCostco common stock
are validly tendered in the Exchange Offer and the Company distributes the
remaining Price Enterprises shares pro rata to all PriceCostco stockholders or
(ii) at least 21.6 million shares of PriceCostco common stock, but less than 27
million shares, are validly tendered, and the Company elects to make a pro rata
distribution of the remaining shares to all PriceCostco stockholders.
At August 28, 1994, 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 $255,000, $278,000 and $154,000 respectively. Early retirement of
these debentures would result in the Company paying a call premium.
Maturities of long-term debt during the next five fiscal years and
thereafter are as follows:
1995............................................................. $ 6,426
1996............................................................. 2,023
1997............................................................. 5,643
1998............................................................. 1,577
1999............................................................. 1,738
Thereafter....................................................... 784,511
---------
Total........................................................ $ 801,918
---------
---------
NOTE 5 -- LEASES
The Company leases land and/or warehouse buildings at 47 warehouses open at
August 28, 1994 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
46
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 -- LEASES (CONTINUED)
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 1994, 1993 and 1992 was $44,900, $38,700
and $33,680, respectively. Future minimum payments (including annual rents on
the four Warehouse Properties discussed in Note 3) during the next five fiscal
years and thereafter under noncancelable leases with terms in excess of one
year, at August 28, 1994, were as follows:
1995............................................................. $ 54,293
1996............................................................. 52,409
1997............................................................. 50,257
1998............................................................. 48,172
1999............................................................. 46,584
Thereafter....................................................... 538,808
---------
Total minimum payments....................................... $ 790,523
---------
---------
NOTE 6 -- 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 as they vest. 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:
STOCK RANGE OF EXERCISE
OPTIONS PRICE PER SHARE
--------- ------------------
Under option at August 30, 1992.......................................... 12,882 $ .17 - $40.17
Granted................................................................ 2,295 15.38 - 26.63
Exercised.............................................................. (1,538) .17 - 19.67
Cancelled.............................................................. (735) 5.67 - 40.17
---------
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
---------
---------
Options exercisable at August 28, 1994................................... 6,765
---------
---------
47
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
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:
STOCK STOCK RANGE OF EXERCISE
OPTIONS GRANTS PRICE PER SHARE
----------- ----------- -----------------
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
--
--
-----
-----
Options exercisable at August 28, 1994............................ 32 --
--
--
-----
-----
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 period from the date of
issuance and are exercisable up to eight years and one month from the grant
date. A total of 532,500 warrants have been exercised.
NOTE 7 -- RETIREMENT PLANS
The Company has a defined contribution retirement plan for all United States
employees of Price except California union employees on whose behalf
contributions are made to the Western Conference of Teamsters Pension Trust
Fund. Contributions to such retirement plan totaled $11,018, $10,665 and $9,375
for fiscal 1994, 1993 and 1992, respectively. Contributions to the Teamsters
Pension Trust Fund were $11,293, $11,588 and $11,196 for fiscal 1994, 1993 and
1992, respectively. During fiscal 1992, a 401(k) Plan was established for all
Price employees eligible for the retirement plan. The Company matches 50% of
eligible employee contributions up to a maximum Company contribution per
employee per year. Contributions to the 401(k) Plan were $971, $752 and $650 in
fiscal 1994, 1993 and 1992, respectively. The Company has a defined contribution
plan for Canadian Price employees and contributes a percentage of each
employee's salary. Contributions were $1,884, $1,640 and $1,331 in fiscal 1994,
1993 and 1992, respectively.
The Company has a 401(k) retirement plan for the benefit of all Costco
employees. After one year of service, an employee is eligible to participate in
this plan. Employee contributions are matched 10% by the Company until the
employee has completed five years of service, at which time the matching
contribution increases to 25%. Contributions were $2,677, $1,964 and $1,515 in
fiscal 1994, 1993 and 1992, respectively.
48
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 -- INCOME TAXES
The provisions for income taxes from continuing operations for fiscal 1994,
1993 and 1992 are as follows:
1994 1993 1992
--------- ----------- -----------
Federal:
Current......................................................... $ 64,721 $ 87,933 $ 102,043
Deferred........................................................ (5,920) 6,924 127
--------- ----------- -----------
Total federal................................................. 58,801 94,857 102,170
State:
Current......................................................... 15,402 20,149 24,531
Deferred........................................................ (963) 2,321 438
--------- ----------- -----------
Total state................................................... 14,439 22,470 24,969
Foreign:
Current......................................................... 18,211 14,639 19,314
Deferred........................................................ 1,206 1,654 (620)
--------- ----------- -----------
Total foreign................................................. 19,417 16,293 18,694
--------- ----------- -----------
Total provision for income taxes.............................. $ 92,657 $ 133,620 $ 145,833
--------- ----------- -----------
--------- ----------- -----------
A reconciliation between the statutory tax rate and the effective rate from
continuing operations for fiscal 1994, 1993 and 1992 is as follows:
1994 1993 1992
---------------------- ------------------------ ------------------------
Federal taxes at statutory rate.......... $ 71,244 35.0% $ 116,652 34.7% $ 125,411 34.0%
State taxes, net......................... 8,753 4.3 15,141 4.5 17,336 4.7
Foreign taxes, net....................... 1,074 0.5 1,878 0.6 3,377 0.9
Increase in deferred income taxes due to
statutory rate change................... -- -- 600 0.2 -- --
Other.................................... 2,386 1.2 (651) (.3 ) (291) (0.1 )
Tax effect of merger-related expenses.... 9,200 4.5 -- -- -- --
--------- --- ----------- --- ----------- ---
Provision at effective tax rate.......... $ 92,657 45.5 % $ 133,620 39.7 % $ 145,833 39.5 %
--------- --- ----------- --- ----------- ---
--------- --- ----------- --- ----------- ---
The components of the deferred tax assets and liabilities related to
continuing operations are as follows:
AUGUST 28, AUGUST 29,
1994 1993
----------- -----------
Accrued liabilities............................................................ $ 75,697 $ 60,613
Other.......................................................................... 6,145 4,356
----------- -----------
Total deferred tax assets.................................................. 81,842 64,969
Property and equipment......................................................... 66,118 61,589
Merchandise inventories........................................................ 21,199 11,684
Other.......................................................................... 5,487 8,335
----------- -----------
Total deferred tax liabilities............................................. 92,804 81,608
----------- -----------
Net deferred tax liabilities............................................... $ 10,962 $ 16,639
----------- -----------
----------- -----------
49
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 -- INCOME TAXES (CONTINUED)
The net deferred tax liabilities at August 28, 1994 and August 29, 1993
include current deferred income tax assets of $54,717 and $34,901, respectively,
and non-current deferred income tax liabilities of $65,679 and $51,540,
respectively.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On April 6, 1992, Price was served with a complaint in an action entitled
FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United States
District Court, Southern District of California (the Court). Subsequently on
April 22, 1992, Price was served with a first amended complaint in the action.
The case was dismissed without prejudice by the Court on September 21, 1992, on
the grounds the plaintiffs had failed to state a sufficient claim against
defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in
the opinion of Price's counsel, alleged substantially the same facts as the
prior complaint. The case was dismissed with prejudice by the Court on March 9,
1993, on grounds the plaintiffs had failed to state a sufficient claim against
defendants. Plaintiffs have filed a Notice of Appeal in the Ninth Circuit Court
of Appeals, which was argued on October 4, 1994. The Company is currently
awaiting a Ninth Circuit Court of Appeals decision. If the Ninth Circuit Court
of Appeals renders a decision that is adverse to the Company, the Company
intends to vigorously defend the suit. The Company does not believe that the
ultimate outcome of such litigation will have a material adverse effect on the
Company's financial position or results of operations.
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations.
NOTE 10 -- RELATED PARTY TRANSACTIONS
Joseph Kornwasser, a 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 K & F. On August 12, 1993, Mr.
Kornwasser became Chief Executive Officer and director of the REIT. On that
date, the REIT also obtained the right to acquire certain of the partnership
interests of K & F described above. On August 28, 1994, the Company purchased
both K & F's interests in the two partnerships and its rights under the
Development Agreement for a total of $2.5 million.
50
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 -- GEOGRAPHIC INFORMATION
The following table indicates the relative amounts of total revenue,
operating income and identifiable assets for the Company during fiscal 1994,
1993 and 1992:
1994 1993 1992
-------------- -------------- --------------
Total revenue:
United States.................................................. $ 13,770,316 $ 13,167,175 $ 12,058,694
Foreign........................................................ 2,710,327 2,296,639 2,038,684
-------------- -------------- --------------
$ 16,480,643 $ 15,463,814 $ 14,097,378
-------------- -------------- --------------
-------------- -------------- --------------
Operating income:
United States.................................................. $ 298,303 $ 321,084 $ 326,321
Foreign........................................................ 61,836 43,745 49,101
-------------- -------------- --------------
$ 360,139 $ 364,829 $ 375,422
-------------- -------------- --------------
-------------- -------------- --------------
AUGUST 28, AUGUST 29,
1994 1993
-------------- --------------
Identifiable assets:
United States.................................................. $ 3,221,210 $ 3,003,494
Foreign........................................................ 637,364 485,495
Discontinued operations -- net assets (all United States)...... 377,085 441,810
-------------- --------------
$ 4,235,659 $ 3,930,799
-------------- --------------
-------------- --------------
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables on the next two pages reflect the unaudited quarterly results of
operations for fiscal 1994 and 1993.
All information has been restated for discontinued real estate operations
and various reclassifications have been made to conform Price and Costco's
classification of merchandise costs and selling, general and administrative
expenses. Shares used in the earnings per share calculation fluctuate by quarter
depending primarily upon whether convertible subordinated debentures are
dilutive during the respective period.
51
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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
------------- -------------- ------------- -------------- --------------
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
S,G&A 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
closings 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
Provision for merger and restructuring
expenses............................... (120,000) -- -- -- (120,000)
------------- -------------- ------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES........ (47,033) 101,212 49,907 99,469 203,555
Provision 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 (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE -- FULLY DILUTED
Continuing operations................... $ (0.17) $ 0.27 $ 0.14 $ 0.27 $ 0.51
Discontinued operations:
Income (loss), net of tax............. 0.02 0.01 0.01 (.23 ) (.19)
Loss on disposal...................... -- -- -- (.83 ) (.83)
------------- -------------- ------------- -------------- --------------
Net income (loss)....................... $ (0.15) $ 0.28 $ 0.15 $ (0.79 ) $ (0.51)
------------- -------------- ------------- -------------- --------------
------------- -------------- ------------- -------------- --------------
Shares used in the calculation.......... 217,191 240,011 219,516 219,279 219,334
------------- -------------- ------------- -------------- --------------
------------- -------------- ------------- -------------- --------------
52
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED AUGUST 29, 1993
----------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
12 WEEKS 12 WEEKS 12 WEEKS 16 WEEKS 52 WEEKS
------------- -------------- ------------- -------------- --------------
REVENUE
Net sales............................... $ 3,422,457 $ 3,736,234 $ 3,348,255 $ 4,647,739 $ 15,154,685
Membership fees and other............... 80,014 75,125 67,092 86,898 309,129
------------- -------------- ------------- -------------- --------------
Total revenue......................... 3,502,471 3,811,359 3,415,347 4,734,637 15,463,814
OPERATING EXPENSES
Merchandise costs....................... 3,121,324 3,382,337 3,047,712 4,199,780 13,751,153
S,G&A expenses.......................... 292,758 312,422 303,195 406,285 1,314,660
Preopening expenses..................... 11,551 4,834 3,465 8,322 28,172
Provision for estimated warehouse
closings costs......................... -- -- -- 5,000 5,000
------------- -------------- ------------- -------------- --------------
Operating income...................... 76,838 111,766 60,975 115,250 364,829
OTHER INCOME (EXPENSE)
Interest expense........................ (9,444) (10,963) (11,445) (14,264) (46,116)
Interest income and other............... 4,713 4,264 3,825 4,948 17,750
------------- -------------- ------------- -------------- --------------
INCOME BEFORE PROVISION FOR INCOME
TAXES.................................... 72,107 105,067 53,355 105,934 336,463
Provision for income taxes.............. 28,843 42,027 21,443 41,307 133,620
------------- -------------- ------------- -------------- --------------
INCOME FROM
CONTINUING OPERATIONS.................... 43,264 63,040 31,912 64,627 202,843
DISCONTINUED OPERATIONS:
Income, net of tax...................... 1,064 5,989 2,039 11,312 20,404
Loss on disposal........................ -- -- -- -- --
------------- -------------- ------------- -------------- --------------
NET INCOME................................ $ 44,328 $ 69,029 $ 33,951 $ 75,939 $ 223,247
------------- -------------- ------------- -------------- --------------
------------- -------------- ------------- -------------- --------------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE -- FULLY DILUTED
Continuing operations................... $ 0.20 $ 0.28 $ 0.15 $ 0.29 $ 0.92
Discontinued operations:
Income................................ 0.00 0.02 0.01 0.05 0.08
Loss on disposal...................... -- -- -- -- --
------------- -------------- ------------- -------------- --------------
Net income.............................. $ 0.20 $ 0.30 $ 0.16 $ 0.34 $ 1.00
------------- -------------- ------------- -------------- --------------
------------- -------------- ------------- -------------- --------------
Shares used in the calculation............ 227,879 240,341 226,976 239,495 240,162
------------- -------------- ------------- -------------- --------------
------------- -------------- ------------- -------------- --------------
53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Price/Costco, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements included in Price/Costco, Inc.'s annual report to
stockholders included in this Form 10-K, and have issued our report thereon
dated November 14, 1994. As noted in our report to the accompanying financial
statements, The Price Company and subsidiaries (Price) have been audited by
other auditors whose report thereon has been forwarded to us and our opinion
expressed herein, insofar as it relates to the amounts included in the
accompanying schedules related to Price for fiscal 1993 and 1992, is based
solely on the report of the other auditors. Our audit was made for the purpose
of forming an opinion on those statements taken as a whole. The schedules of
Price/Costco, Inc. listed in Part IV, Item 14 are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Seattle, Washington
November 14, 1994
54
SCHEDULE I
PRICE/COSTCO, INC.
MARKETABLE SECURITIES--OTHER INVESTMENTS
FOR THE PERIODS ENDED AUGUST 28, 1994, AUGUST 29, 1993 AND AUGUST 30, 1992
(DOLLARS IN THOUSANDS)
AMOUNT AT WHICH
NAME OF ISSUER AND MARKET VALUE AT CARRIED IN THE BALANCE
TITLE OF EACH ISSUE PRINCIPAL AMOUNT COST BALANCE SHEET DATE SHEET
- ----------------------------------------- ---------------- --------- ------------------ --------------------------
AUGUST 28, 1994
U.S. Government Obligations............ $ 9,345 $ 9,253 $ 9,253 $ 9,253
Other.................................. 15 15 15 15
-------- --------- -------- --------
$ 9,360 $ 9,268 $ 9,268 $ 9,268
-------- --------- -------- --------
-------- --------- -------- --------
AUGUST 29, 1993
U.S. Government Obligations............ $ 90,096 $ 89,854 $ 89,840 $ 89,854
Other.................................. 262 262 262 262
-------- --------- -------- --------
$ 90,358 $ 90,116 $ 90,102 $ 90,116
-------- --------- -------- --------
-------- --------- -------- --------
AUGUST 30, 1992
U.S. Government Obligations............ $ 78,660 $ 78,488 $ 78,628 $ 78,488
Other.................................. 20,879 20,837 20,837 20,837
-------- --------- -------- --------
$ 99,539 $ 99,325 $ 99,465 $ 99,325
-------- --------- -------- --------
-------- --------- -------- --------
55
SCHEDULE II
PRICE/COSTCO, INC.
AMOUNTS RECEIVABLE FROM RELATED PARTIES
FOR THE 52-WEEK PERIODS ENDED AUGUST 28, 1994, AUGUST 29, 1993 AND AUGUST 30,
1992
(DOLLARS IN THOUSANDS)
DEDUCTIONS BALANCE AT END OF
BALANCE AT ----------- PERIOD
BEGINNING AMOUNTS -------------------------
DEBTOR OF PERIOD ADDITIONS COLLECTED CURRENT NON-CURRENT
- ------------------------------------------------------ ----------- ----------- ----------- ----------- ------------
PERIOD ENDED AUGUST 28, 1994
Roseway Partners (a)................................ $ 9,800 $ -- $ -- $ -- $ 9,800
Sol Price........................................... 34 973 1,007 -- --
The Price REIT, Inc................................. 84 29 113 -- --
PERIOD ENDED AUGUST 29, 1993
Roseway Partners (a)................................ 9,600 200 -- -- 9,800
Sol Price........................................... 115 833 914 34 --
The Price REIT, Inc................................. 85 330 331 84 --
PERIOD ENDED AUGUST 30, 1992
Roseway Partners (a)................................ 9,600 -- -- -- 9,600
Sol Price........................................... 75 1,082 1,042 115 --
(a) Original interest rate at 9.875%. Rate adjusted to 8.5% on 1/1/93.
56
SCHEDULE V
PRICE/COSTCO, INC.
PROPERTY, PLANT AND EQUIPMENT
FOR THE 52-WEEK PERIODS ENDED AUGUST 28, 1994, AUGUST 29, 1993 AND AUGUST 30,
1992
(DOLLARS IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO OTHER CHARGES
BEGINNING COSTS AND ADD (DEDUCT) BALANCE AT END
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS DESCRIBE (1) OF PERIOD
- ---------------------------------------- ------------- ----------- ----------- -------------- --------------
PERIOD ENDED AUGUST 28, 1994:
Land and land improvements............ $ 862,407 $ 100,235 $ 8,706 $ (75,078) $ 878,858
Buildings and leasehold
improvements......................... 880,113 59,342 6,020 157,638 1,091,073
Equipment and fixtures................ 433,502 99,428 8,469 (1,151) 523,310
Construction in progress.............. 116,291 218,113 1,398 (254,742) 78,264
------------- ----------- ----------- -------------- --------------
Total............................... $ 2,292,313 $ 477,118 $ 24,593 $ (173,333) $ 2,571,505
------------- ----------- ----------- -------------- --------------
------------- ----------- ----------- -------------- --------------
PERIOD ENDED AUGUST 29, 1993:
Land and land improvements............ $ 773,699 $ 146,010 $ 1,406 $ (55,896) $ 862,407
Buildings and leasehold
improvements......................... 736,463 26,713 594 117,531 880,113
Equipment and fixtures................ 343,983 97,266 13,477 5,730 433,502
Construction in progress.............. 96,654 260,045 146 (240,262) 116,291
------------- ----------- ----------- -------------- --------------
Total............................... $ 1,950,799 $ 530,034 $ 15,623 $ (172,897) $ 2,292,313
------------- ----------- ----------- -------------- --------------
------------- ----------- ----------- -------------- --------------
PERIOD ENDED AUGUST 30, 1992:
Land and land improvements............ $ 519,528 $ 246,797 $ 17,067 $ 24,441 $ 773,699
Buildings and leasehold
improvements......................... 553,154 47,156 19,692 155,845 736,463
Equipment and fixtures................ 238,150 109,241 12,803 9,395 343,983
Construction in progress.............. 56,858 235,781 2,597 (193,388) 96,654
------------- ----------- ----------- -------------- --------------
Total............................... $ 1,367,690 $ 638,975 $ 52,159 $ (3,707) $ 1,950,799
------------- ----------- ----------- -------------- --------------
------------- ----------- ----------- -------------- --------------
- ------------------------
(1) Other changes for fiscal 1994, 1993 and 1992 are as follows:
1994 1993 1992
------------ ------------ ---------
Foreign currency rate differentials
Land and land improvements............................................ $ (4,837) $ (9,346) $ (2,056)
Buildings and leasehold improvements.................................. (6,255) (9,008) (2,857)
Equipment and fixtures................................................ (2,053) (4,916) (1,594)
Construction in progress.............................................. (886) (17) (389)
------------ ------------ ---------
Total foreign currency rate differential.............................. (14,031) (23,287) (6,896)
Transfer to other assets.............................................. (159,302) (149,610) 3,189
------------ ------------ ---------
Total other changes............................................... $ (173,333) $ (172,897) $ (3,707)
------------ ------------ ---------
------------ ------------ ---------
57
SCHEDULE VI
PRICE/COSTCO, INC.
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
FOR THE 52-WEEK PERIODS ENDED AUGUST 28, 1994, AUGUST 29, 1993 AND AUGUST 30,
1992
(DOLLARS IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO OTHER CHANGES
BEGINNING COSTS AND ADD (DEDUCT) BALANCE AT END
CLASSIFICATION OF PERIOD EXPENSES RETIREMENTS DESCRIBE (1) OF PERIOD
- ------------------------------------------ ----------- ----------- ----------- -------------- --------------
PERIOD ENDED AUGUST 28, 1994:
Land and land improvements.............. $ 4,079 $ 4,056 $ 160 $ 5,549 $ 13,524
Buildings and leasehold improvements.... 118,312 52,639 2,462 (30,168) 138,321
Equipment and fixtures.................. 203,321 82,529 6,203 (6,383) 273,264
----------- ----------- ----------- -------------- --------------
Total................................. $ 325,712 $ 139,224 $ 8,825 $ (31,002) $ 425,109
----------- ----------- ----------- -------------- --------------
----------- ----------- ----------- -------------- --------------
PERIOD ENDED AUGUST 29, 1993:
Land and land improvements.............. $ -- $ 4,079 $ -- $ -- $ 4,079
Buildings and leasehold improvements.... 96,947 32,663 128 (6,732 ) 118,312
Equipment and fixtures.................. 149,800 65,484 9,115 (2,848 ) 203,321
----------- ----------- ----------- -------------- --------------
Total................................. $ 246,747 $ 102,226 $ 9,243 $ (9,580 ) $ 325,712
----------- ----------- ----------- -------------- --------------
----------- ----------- ----------- -------------- --------------
PERIOD ENDED AUGUST 30, 1992:
Land and land improvements.............. $ -- $ -- $ -- $ -- $ --
Buildings and leasehold improvements.... 73,351 29,986 6,081 (309 ) 96,947
Equipment and fixtures.................. 110,907 49,522 9,856 (773 ) 149,800
----------- ----------- ----------- -------------- --------------
Total................................. $ 184,258 $ 79,508 $ 15,937 $ (1,082 ) $ 246,747
----------- ----------- ----------- -------------- --------------
----------- ----------- ----------- -------------- --------------
- ------------------------
(1) Other changes for fiscal 1994, 1993 and 1992 are as follows:
1994 1993 1992
---------- --------- ---------
Foreign currency rate differentials
Land and land improvements.............................................. $ -- $ -- $ --
Buildings and leasehold improvements.................................... (372) (791) (216)
Equipment and fixtures.................................................. (822) (1,695) (781)
---------- --------- ---------
Total foreign currency rate differential................................ (1,194) (2,486) (997)
Transfers to other assets................................................. (29,808) (7,094) (85)
---------- --------- ---------
Total other changes....................................................... $ (31,002) $ (9,580) $ (1,082)
---------- --------- ---------
---------- --------- ---------
58
SCHEDULE IX
PRICE/COSTCO, INC.
SHORT-TERM BORROWINGS
FOR THE 52-WEEK PERIODS ENDED AUGUST 28, 1994, AUGUST 29, 1993 AND AUGUST 30,
1992
(DOLLARS IN THOUSANDS)
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
CATEGORY OF AGGREGATE BALANCE AT WEIGHTED AVERAGE OUTSTANDING DURING OUTSTANDING DURING INTEREST RATE DURING
SHORT-TERM BORROWINGS END OF PERIOD INTEREST RATE (1) THE PERIOD THE PERIOD (2) THE PERIOD (2)(3)
- ------------------------------ ------------- ----------------- ------------------ ------------------ ---------------------
PERIOD ENDED AUGUST 28, 1994
Bank borrowings:
U.S. (4).................. $ -- -- % $ 142,000 $ 16,786 3.46 %
Canadian (5).............. -- -- 25,369 8,072 6.47
Commercial Paper (6)........ 149,340 4.84 149,340 35,655 3.92
PERIOD ENDED AUGUST 29, 1993
Bank borrowings:
U.S. (4).................. $ -- -- % $ 55,000 $ 15,455 3.56 %
Canadian (5).............. 4,097 5.75 12,358 3,295 6.05
Commercial Paper (6)........ 18,996 3.30 55,000 16,119 3.29
PERIOD ENDED AUGUST 30, 1992
Bank borrowings............. $ -- -- % $ -- $ -- -- %
Commercial Paper............ -- -- -- -- --
- ------------------------
(1) The interest rate effective on borrowings at the end of the period.
(2) The average amount outstanding during the period was computed by dividing
the total of daily outstanding principal balances by 364 days.
(3) The weighted average interest rate during the period was computed by
dividing the actual interest expense by average short-term debt
outstanding.
(4) U.S. bank borrowings represent borrowings under a senior revolving credit
agreement with a termination date of March 30, 1994.
(5) Canadian bank borrowings represent borrowings under a senior revolving
credit agreement with a termination date of December 31, 1993.
(6) Commercial paper maturities range from overnight to 8 weeks from date of
issuance.
59
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------------- ---------------------------------------------------------------------------------------------
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................................
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) Specimen of 5 1/2% Convertible Subordinated Debenture. (1)
4(a)(2) Form of 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) Specimen of 6 3/4% Convertible Subordinated Debenture (2)
4(b)(2) Form of 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(b)(5) Notice and offer to purchase by PriceCostco, Inc. and The Price Company to First Interstate
Bank of California, as trustee and Holders of 6 3/4% Convertible Subordinated Debentures of
The Price Company (6)
4(b)(6) Incorporated by reference in Form 8-A filed with respect to the Registration Statement of the
Company's 6 3/4% Convertible Subordinated Debentures dated December 21, 1993
4(b)(7) Incorporated by reference in Form 15 with respect to the notice of termination of the
Registration of Price's 6 3/4% Convertible Subordinated Debentures dated January 3, 1994
4(c)(1) Specimen of 5 3/4% Convertible Subordinated Debenture (5)
4(c)(2) Copy of the form of Indenture dated as of May 15, 1992 between Costco and First Trust
National Association, as Trustee (5)
4(c)(3) Copy of First Supplemental Indenture dated as of October 21, 1993 between Costco, PriceCostco
and First Trust National Association, as Trustee (8)
4(c)(4) Incorporated by reference in Form 15 with respect to the notice of termination of the
registration of Costco's 5 3/4% Convertible Subordinated Debentures dated December 21, 1993
4(d) Form of Price/Costco, Inc. Stock Certificate (4)
10(a) The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option Plan (4)...................
10(b) Form of Indemnification Agreement............................................................
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)
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)
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......................................................................
- ------------------------
(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