-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AJzi/g6aEVI6kWJua9dG12C7FxIfQZPFy0H/lyKUVCMzCuRvKOwr9Re4pJaPqkFa gp6q3r4ykyayrOVnLiBLbA== 0000912057-97-011632.txt : 19970403 0000912057-97-011632.hdr.sgml : 19970403 ACCESSION NUMBER: 0000912057-97-011632 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970216 FILED AS OF DATE: 19970402 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSTCO COMPANIES INC CENTRAL INDEX KEY: 0000909832 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 330572969 STATE OF INCORPORATION: CA FISCAL YEAR END: 0830 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-04355 FILM NUMBER: 97573197 BUSINESS ADDRESS: STREET 1: 999 LAKE DRIVE CITY: ISSAQUAH STATE: WA ZIP: 98027- BUSINESS PHONE: (206)-313-8100 MAIL ADDRESS: STREET 1: 999 LAKE DRIVE CITY: ISSAQUAD STATE: WA ZIP: 98027 FORMER COMPANY: FORMER CONFORMED NAME: PRICE/COSTCO INC DATE OF NAME CHANGE: 19930728 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED FEBRUARY 16, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-20355 COSTCO COMPANIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0572969 (State or other (I.R.S.Employer jurisdiction of Identification incorporation or No.) organization)
999 LAKE DRIVE ISSAQUAH, WASHINGTON 98027 (Address of principal executive office) (206) 313-8100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / The registrant had 211,133,408 common shares, par value $.01, outstanding at March 14, 1997. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COSTCO COMPANIES, INC. AND SUBSIDIARIES INDEX TO FORM 10-Q PART I--FINANCIAL INFORMATION
PAGE ----- ITEM 1--FINANCIAL STATEMENTS............................................................................... 3 Condensed Consolidated Balance Sheets.................................................................... 12 Condensed Consolidated Statements of Operations.......................................................... 13 Condensed Consolidated Statements of Cash Flows.......................................................... 14 Notes to Condensed Consolidated Financial Statements..................................................... 15 ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 3
PART II--OTHER INFORMATION ITEM 1--LEGAL PROCEEDINGS............................................................. 8 ITEM 2--CHANGES IN SECURITIES......................................................... 8 ITEM 3--DEFAULTS UPON SENIOR SECURITIES............................................... 9 ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 9 ITEM 5--OTHER INFORMATION............................................................. 9 ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.............................................. 10 Exhibit 3(a) Restated And Amended Certificate of Incorporation of Costco Companies, Inc. Exhibit (27) Financial Data Schedule Exhibit (28) Report of Independent Public Accountants............................... 19
2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Costco Companies, Inc.'s (the "Company" or "Costco"; formerly Price/Costco, Inc.) unaudited condensed consolidated balance sheet as of February 16, 1997, and the condensed consolidated balance sheet as of September 1, 1996, unaudited condensed consolidated statements of operations for the 12- and 24-week periods ended February 16, 1997, and February 18, 1996, and unaudited condensed consolidated statements of cash flows for the 24-week periods then ended are included elsewhere herein. Also, included elsewhere herein are notes to the unaudited condensed consolidated financial statements and the results of the limited review performed by Arthur Andersen LLP, independent public accountants. The Company reports on a 52/53-week fiscal year, consisting of 13 four-week periods and ending on the Sunday nearest the end of August. Fiscal 1997 is a 52-week year with period 13 ending on August 31, 1997. The first, second, and third quarters consist of 12 weeks each and the fourth quarter consists of 16 weeks. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS It is suggested that this management discussion be read in conjunction with the management discussion included in the Company's fiscal 1996 annual report on Form 10-K previously filed with the Securities and Exchange Commission. COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 16, 1997 AND FEBRUARY 18, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income for the second quarter of fiscal 1997 increased 36% to $97,449, or $0.46 per share (fully diluted), from $71,426, or $0.35 per share (fully diluted), during the second quarter of fiscal 1996. Net sales increased 12% to $5,147,425 during the second quarter of fiscal 1997 from $4,606,070 during the second quarter of fiscal 1996. This increase was primarily due to an increase in comparable warehouse sales and opening a net of 8 warehouses (19 opened--14 new, 5 relocated and 11 closed) since the end of the second quarter of fiscal 1996. Comparable sales, that is sales in warehouses open for at least a year, increased 9 percent during the second quarter of fiscal 1997, reflecting new marketing and merchandising efforts, including the rollout of fresh foods and various ancillary businesses to certain existing locations. Changes in prices of merchandise did not materially contribute to sales increases. Membership fees and other revenue increased 11% to $91,468 or 1.78% of net sales in the second quarter of fiscal 1997 from $82,625 or 1.79% of net sales in the second quarter of fiscal 1996. Membership fees include membership sign-ups at the new warehouses opened since the end of the second quarter of fiscal 1996. The increase in membership fees also reflects the increase in the annual membership fee for the Business "Add-on" members from $15 to $20, effective with renewals in the United States subsequent to April 1, 1996. Currently, there are approximately 3.4 million U.S. Business "Add-on" members. Gross margin (defined as net sales minus merchandise costs) increased 17% to $528,217 or 10.26% of net sales in the second quarter of fiscal 1997 from $452,078 or 9.81% of net sales in the second quarter of fiscal 1996. The 45 basis point increase in gross margin as a percentage of net sales reflects strong first half physical inventory results, the Company's greater purchasing power, expanded use of its depot facilities, improved fresh foods margins, improved softlines margins, and increased sales penetration of certain higher gross margin ancillary businesses. The gross margin figures reflect accounting for merchandise costs on the last-in, first-out (LIFO) method. The second quarters of fiscal 1997 and 1996 each included a $2,500 LIFO provision. Selling, general and administrative expenses as a percent of net sales decreased to 8.47% during the second quarter of fiscal 1997 from 8.51% during the second quarter of fiscal 1996. This improvement in 3 selling, general and administrative expenses as a percent of net sales was due to the operating expense leverage from the increase in comparable warehouse sales noted above, resulting in a year-over-year improvement at the Company's core warehouse operations and Central and Regional administrative offices. This expense improvement was partially offset by higher expenses as a percent of net sales associated with international expansion and certain ancillary businesses. Preopening expenses totaled $6,087 or 0.12% of net sales during the second quarter of fiscal 1997 compared to $5,970 or 0.13% of net sales during the second quarter of fiscal 1996. Two warehouses were opened in the second quarter of fiscal 1997 (including a relocated warehouse), compared to eight new locations opened during the last year's second quarter (including a relocated warehouse). Preopening expenses also includes costs related to remodel activity, including expanded fresh foods and ancillary operations at existing warehouses. Interest expense totaled $17,243 in the second quarter of fiscal 1997 compared to $17,501 in the second quarter of fiscal 1996. The decrease in interest expense is primarily related to the call for redemption of both the Company's 6 3/4%($285.1 million principal amount) and 5 1/2% ($179.3 million principal amount) Convertible Subordinated Debentures during the second quarter of fiscal 1997, which resulted in a net reduction of debt by over $300 million following the completion of these two transactions. See "Note 2--Debt". This decrease in interest expense was partially offset by the redemption premium paid to debenture holders who elected to redeem their debentures and the issuance in April 1996 of a $140,000 unsecured note payable. Interest income and other totaled $3,461 in the second quarter of fiscal 1997 compared to $2,287 in the second quarter of fiscal 1996. The increase is primarily due to the Company incurring an elimination in its share of losses in certain unconsolidated joint ventures and improved earnings in its Mexico joint venture operation. The effective income tax rate on earnings in the second quarter of fiscal 1997 was 40.50% compared to a 41.25% effective tax rate in the second quarter of fiscal 1996. The decrease in the effective tax rate was related primarily to decreases in foreign taxes. COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 16, 1997 AND FEBRUARY 18, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net operating results for the first half of fiscal 1997 reflect net income of $129,259, or $0.62 per share (fully diluted), compared to net income of $120,979, or $0.59 per share (fully diluted), during the first half of fiscal 1996. Net income in the first half of fiscal 1997 included a non-cash, pretax charge of $65,000 ($38,675 after-tax) reflecting a provision for the impairment of long-lived assets as required by the Company's adoption of Statement of Financial Accounting Standard No. 121. Excluding the $65,000 ($38,675 after-tax) asset impairment charge, net income for the first half of fiscal 1997 would have increased 39% to $167,934, or $0.79 per share (fully diluted). The Company also recorded in the first half of fiscal 1997, a pretax provision for warehouse closing costs of $5,000, or $0.01 per share on an after-tax basis (fully diluted). This provision primarily includes estimated closing costs for five warehouses closed in the first half of fiscal 1997 and additional costs related to warehouses closed in the prior year. There were no warehouse closing costs in the first half of fiscal 1996. Net sales increased 12% to $9,933,061 during the first half of fiscal 1997 from $8,901,932 during the first half of fiscal 1996. This increase was primarily due to an increase in comparable warehouse sales and opening a net of 8 warehouses (19 opened--14 new, 5 relocated and 11 closed) since the end of the second quarter of fiscal 1996. Comparable sales, that is sales in warehouses open for at least a year, increased 9 percent during the first half of fiscal 1997, reflecting new marketing and merchandising efforts, including the rollout of fresh foods and various ancillary businesses to certain existing locations. Changes in prices of merchandise did not materially contribute to sales increases. 4 Membership fees and other revenue increased to $189,240 or 1.91% of net sales in the first half of fiscal 1997 from $170,327 or 1.91% of net sales in the first half of fiscal 1996. Membership fees include membership sign-ups at the new warehouses opened since the end of the second quarter of fiscal 1996. The increase in membership fees also reflects the increase in the annual membership fee for the Business "Add-on" members from $15 to $20, effective with renewals in the United States subsequent to April 1, 1996. Currently, there are approximately 3.4 million U.S. Business "Add-on" members. Gross margin (defined as net sales minus merchandise costs) increased 17% to $1,005,483 or 10.12% of net sales in the first half of fiscal 1997 from $860,824 or 9.67% of net sales in the first half of fiscal 1996. The 45 basis point increase in gross margin reflects strong first half physical inventory results, the Company's greater purchasing power, expanded use of the Company's depot facilities, improved fresh foods margins, improved softlines margins, and increased sales penetration of certain higher gross margin ancillary businesses. The gross margin figures reflect accounting for merchandise costs on the last-in, first-out (LIFO) method. The first half of fiscal 1997 and 1996 each include a $5,000 LIFO provision. Selling, general and administrative expenses as a percent of net sales decreased to 8.68% during the first half of fiscal 1997 from 8.74% during the first half of fiscal 1996. This improvement in selling, general and administrative expenses as a percent of net sales was due to the increase in comparable warehouse sales noted above, and a year-over-year improvement at the Company's core warehouse operations and Central and Regional administrative offices, which was partially offset by higher expenses as a percent of net sales associated with international expansion and certain ancillary businesses. Preopening expenses totaled $16,284 or 0.16% of net sales during the first half of fiscal 1997 compared to $15,420 or 0.17% of net sales during the first half of fiscal 1996. Eleven warehouses were opened in the first half of fiscal 1997 (including four relocated warehouses), compared to twelve new locations during the last year's first half (including a relocated warehouse). Preopening expenses also includes costs related to remodels, including expanded fresh foods and ancillary operations at existing warehouses. Interest expense totaled $36,176 in the first half of fiscal 1997 compared to $35,272 in the first half of fiscal 1996. The increase in interest expense is primarily related to the issuance in April 1996 of a $140,000 unsecured note payable and the redemption premium paid to debenture holders who elected to redeem their debentures. This increase is offset by lower interest expense in the second quarter on convertible subordinated debentures following the redemption/conversion of the Company's 6 3/4% ($285.l million principal amount) and 5 1/2% ($179.3 million principal amount) Convertible Subordinated Debentures. Interest income and other totaled $7,119 in the first half of fiscal 1997 compared to $3,378 in the first half of fiscal 1996. The increase is primarily due to the Company incurring an elimination in its share of losses in certain unconsolidated joint ventures and improved earnings in its Mexico joint venture operation. The effective income tax rate on earnings in the first half of fiscal 1997 was 40.50% compared to a 41.25% effective tax rate in the first half of fiscal 1996. The decrease in the effective tax rate was related primarily to decreases in foreign taxes. LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS) The discussion below contains forward-looking statements that involve risks and uncertainties, and should be read in conjunction with the Company's reports filed previously with the Securities and Exchange Commission. Actual results may differ materially. 5 EXPANSION PLANS Costco's primary requirement for capital is the financing of the land, building and equipment costs for new warehouses plus the costs of initial warehouse operations and working capital requirements, as well as additional capital for international expansion through investments in foreign subsidiaries and joint ventures. While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management's current intention to spend an aggregate of approximately $400,000 to $425,000 during fiscal 1997 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $80,000 to $100,000 for international expansion, including the United Kingdom, Asia and other potential ventures. These expenditures will be financed with a combination of cash provided from operations, the use of cash and cash equivalents (which totaled $87,548 at February 16, 1997), short-term borrowings under revolving credit facilities and/or commercial paper facilities, and other financing sources as required. Expansion plans for the United States and Canada during fiscal 1997 are to open approximately 20 new warehouse clubs, including seven relocations. Through the end of the first half of fiscal 1997, the Company has opened ten warehouses in the United States (including the relocation of four warehouses), closed outright one warehouse in Canada, and opened one warehouse in Taiwan in January 1997. The Company expects to continue expansion of its international operations and plans to open one to two additional United Kingdom units through its 60%-owned subsidiary during the second half of fiscal 1997. Other markets are being assessed, particularly in the Pacific Rim. Costco Companies, Inc. and its Mexico-based joint venture partner, Controladora Comercial Mexicana, each own a 50% interest in Price Club Mexico following the Company's acquisition of Price Enterprises' interest in Price Club Mexico in April, 1995. Price Club Mexico's expansion plans include the opening one to two new warehouse clubs during fiscal 1997. As of February 16, 1997, Price Club Mexico operated 13 Price Club warehouses in Mexico. BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN US DOLLARS) The Company has a domestic multiple-option loan facility with a group of 12 banks, which provides for borrowings of up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 26, 1998, and $250,000 expires on January 30, 2001. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At February 16, 1997, no amount was outstanding under the loan facility and $156,000 was outstanding under the commercial paper program. In addition, a wholly-owned Canadian subsidiary has a $148,000 commercial paper program supported by a $104,000 bank credit facility with three Canadian banks, of which $63,000 will expire in April 1997 and $41,000 will expire in March 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At February 16, 1997, no amount was outstanding under the bank credit facility and $63,000 was outstanding under the Canadian commercial paper program. The Company expects to renew for an additional one-year term the $63,000 portion of the loan facility expiring in April 1997, at substantially the same terms. The Company has agreed to limit the combined amount outstanding under the U.S. and Canadian commercial paper programs to the $604,000 combined amounts of the respective supporting bank credit facilities. LETTERS OF CREDIT The Company also has separate letter of credit facilities (for commercial and standby letters of credit), totaling approximately $179,000. The outstanding commitments under these facilities at February 16, 1997 6 totaled approximately $72,000, including approximately $37,000 in standby letters of credit for workers' compensation requirements. REDEMPTION/CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES On November 19, 1996, The Price Company, a wholly-owned subsidiary of the Company, called for redemption all $285,100 of its 6 3/4% Convertible Subordinated Debentures due 2001. On the redemption date, December 4, 1996, approximately $159,400 principal amount of the Debentures were converted into approximately 7.1 million shares of Costco Companies, Inc. Common Stock and the remaining $125,700 of Debentures were redeemed at a total cost of $130,300 (including accrued interest and redemption premium). The redemption portion of the transaction was financed with short-term bank borrowings. On December 16, 1996, The Price Company called for redemption all $179,300 of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption date, January 6, 1997, approximately $142,700 principal amount of the Debentures were converted into approximately 6.0 million shares of Costco Companies, Inc. Common Stock and the remaining $36,600 of Debentures were redeemed at a total cost of $37,500 (including accrued interest and redemption premium). The redemption portion of the transaction was paid with cash on hand. FINANCIAL POSITION AND CASH FLOWS Due to rapid inventory turnover, the Company's operations provide a higher level of supplier trade payables in relation to inventory than generally encountered in other forms of retailing. When combined with other current liabilities, the resulting amount typically approaches or exceeds the current assets needed to operate the business (e.g., merchandise inventories, accounts receivable and other current assets). The working capital deficit totaled approximately ($100,700) at February 16, 1997, compared to working capital of $57,000 at September 1, 1996. The decrease in net working capital was primarily due to the short-term financing of the redemption of the Convertible Subordinated Debentures. Net cash provided by operating activities totaled $247,746 in the first half of fiscal 1997 compared to $90,059 in the first half of fiscal 1996. The increase in net cash from operating activities is primarily a result of increased net income, adjusted for the non-cash provision for asset impairments, and reduced net inventory requirements during the first 24 weeks of this fiscal year versus last fiscal year. Net cash used in investing activities totaled $285,539 in the first half of fiscal 1997 compared to $275,077 in the first half of fiscal 1996. The investing activities primarily related to additions to property and equipment for new and remodeled warehouses of $285,113 and $265,076 in the first half of fiscal 1997 and 1996, respectively. Net cash provided by financing activities totaled $23,155 in the first half of fiscal 1997 compared to $179,144 in the first half of fiscal 1996. This decrease is primarily the result of utilizing short-term borrowings to finance the repayment of long-term debt in fiscal 1997 compared to investments in property and equipment in fiscal 1996. The Company's balance sheet as of February 16, 1997 reflects a $313,512 or 6% increase in total assets since September 1, 1996. The increase is primarily due to a net increase in property and equipment primarily related to the Company's expansion program. 7 PART II--OTHER INFORMATION (DOLLARS IN THOUSANDS) ITEM 1. LEGAL PROCEEDINGS On April 6, 1992, The Price Company was served with a Complaint in an action entitled FECHT ET AL. v. THE PRICE COMPANY ET AL., Case No. 92-497, United States District Court, Southern District of California (the "Court"). Subsequently, on April 22, 1992, The Price Company was served with a First Amended Complaint in the action. The case was dismissed without prejudice by the Court on September 21, 1992, on the grounds the plaintiffs had failed to state a sufficient claim against defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in the opinion of the Company's counsel, alleged substantially the same facts as the prior complaint. The Complaint alleged violation of certain state and federal laws during the time period prior to The Price Company's earnings release for the second quarter of fiscal year 1992. The case was dismissed with prejudice by the Court on March 9, 1993, on grounds the plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. In February 1997, the Court granted the plaintiffs' motion for certification of a class consisting of all purchasers of the Common Stock of The Price Company from April 3, 1991 through April 2, 1992. The Company believes that this lawsuit is without merit and is vigorously defending the lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. On December 19, 1994, a Complaint was filed against PriceCostco and certain current and former directors in an action entitled SNYDER V. PRICE/COSTCO, INC. ET. AL., Case No. C94-1874Z, United States District Court, Western District of Washington. On January 4, 1995, a Complaint was filed against PriceCostco in an action entitled BALSAM V. PRICE/COSTCO, INC. ET. AL., Case No. C95-0009Z, United States District Court, Western District of Washington. The Snyder and Balsam Cases were subsequently consolidated and on March 15, 1995, plaintiffs' counsel filed a First Amended And Consolidated Class Action And Derivative Complaint. On November 9, 1995, plaintiffs' counsel filed a Second Amended And Consolidated Class Action And Derivative Complaint. The Second Amended Complaint alleged violation of certain state and federal laws arising from the spin-off and exchange transaction (whereby Price Enterprises, Inc. became a separate, publicly-traded company), and the merger between Costco and The Price Company. In July 1996, an agreement in principle was reached to resolve the lawsuit. Subject to court approval, the resolution will involve the transfer from Price Enterprises, Inc. to the Company of certain intangible assets, including elimination of certain existing non-compete restrictions and operating agreements and the termination or amendment of certain trademark license and assignment agreements. The cash portion of the settlement will be funded by the Company's director and officer insurance coverage and by Price Enterprises. The Company will contribute no money to the settlement. In May 1996, the Company reached an agreement in principle with the Environmental Protection Agency and the U.S. Department of Justice to settle an enforcement action under the Federal Clean Air Act. The action is based on claims that the Company failed to maintain required documentation related to its sale of freon products. Under the terms of the proposed settlement, the Company agreed to pay a civil penalty of $232 and to comply with federal regulations relating to the sale of ozone-depleting substances. The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. ITEM 2. CHANGES IN SECURITIES None. 8 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of stockholders was held on January 29, 1997 at the DoubleTree Paradise Valley Resort in Scottsdale, Arizona. Stockholders of record at the close of business on December 6, 1996 were entitled to notice of and to vote in person or by proxy at the annual meeting. At the date of record, there were 203,861,799 shares outstanding. Certain matters presented for vote received the required majority approval and had the following total, for, against and abstained votes as noted below. (1) To elect three Class I directors to hold office until the 2000 Annual Meeting of Stockholders and, in each case, until his successor is elected and qualified.
W/H AUTHORITY TOTAL AND SHARES FOR AGAINST ABSTAINED VOTED/(%) VOTES/(%) VOTES/(%) VOTES/(%) ---------- ---------- --------- --------------- Jeffrey H. Brotman..... 175,119,511 170,628,182 -- 4,491,329 (Class I) 85.9% 83.7% 2.2% James D. Sinegal....... 175,119,511 170,630,686 -- 4,488,825 (Class I) 85.9% 83.7% 2.2% Richard A. Galanti..... 175,119,511 165,210,311 -- 9,909,200 (Class I) 85.9% 81.0% 4.9%
(2) To amend The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option Plan to increase the number of shares of common stock available for issuance from 10 million shares to 20 million shares.
W/H AUTHORITY TOTAL AND SHARES FOR AGAINST ABSTAINED VOTED/(%) VOTES/(%) VOTES/(%) VOTES/(%) ---------- ---------- --------- --------------- 175,119,511 141,861,981 31,043,334 2,214,196 85.9% 69.6% 15.2% 1.1%
(3) To authorize the amendment of the Company's Certificate of Incorporation to change the name of the Company from Price/Costco, Inc. to Costco Companies, Inc.
W/H AUTHORITY TOTAL AND SHARES FOR AGAINST ABSTAINED VOTED/(%) VOTES/(%) VOTES/(%) VOTES/(%) ---------- ---------- --------- --------------- 175,119,511 171,376,961 1,559,823 2,182,727 85.9% 84.0% 0.8% 1.1%
(4) To consider and ratify the selection of the Company's independent public accountants, Arthur Andersen LLP.
W/H AUTHORITY TOTAL AND SHARES FOR AGAINST ABSTAINED VOTED/(%) VOTES/(%) VOTES/(%) VOTES/(%) ---------- ---------- --------- --------------- Arthur Andersen LLP.... 175,119,511 174,728,995 138,469 252,047 85.9% 85.7% 0.1% 0.1%
ITEM 5. OTHER INFORMATION None. 9 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are included herein or incorporated by reference: 3(a) Restated And Amended Certificate of Incorporation of Costco Companies, Inc. (27) Financial Data Schedule (28) Report of Independent Public Accountants (b) No reports on Form 8-K were filed for the 12 weeks ended February 16, 1997. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COSTCO COMPANIES, INC. REGISTRANT /s/ JAMES D. SINEGAL ------------------------------ Date: March 31, 1997 James D. Sinegal PRESIDENT AND CHIEF EXECUTIVE OFFICER /s/ RICHARD A. GALANTI ------------------------------ Date: March 31, 1997 Richard A. Galanti EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER 11 COSTCO COMPANIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
FEBRUARY 16, SEPTEMBER 1, 1997 1996 ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents............................................................. $ 87,548 $ 101,955 Receivables, net...................................................................... 167,865 137,467 Merchandise inventories, net.......................................................... 1,660,210 1,500,842 Other current assets.................................................................. 78,338 88,040 ------------ ------------ Total current assets................................................................ 1,993,961 1,828,304 ------------ ------------ PROPERTY AND EQUIPMENT Land and land rights.................................................................. 1,068,494 1,055,208 Buildings and leasehold and land improvements......................................... 1,830,443 1,667,697 Equipment and fixtures................................................................ 790,238 716,448 Construction in progress.............................................................. 72,584 104,183 ------------ ------------ 3,761,759 3,543,536 Less accumulated depreciation and amortization........................................ (720,382) (655,226) ------------ ------------ Net property and equipment.......................................................... 3,041,377 2,888,310 ------------ ------------ OTHER ASSETS.......................................................................... 190,035 195,247 ------------ ------------ $ 5,225,373 $4,911,861 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank checks outstanding............................................................... $ 12,832 $ 22,330 Short-term borrowings................................................................. 218,564 59,928 Accounts payable...................................................................... 1,319,321 1,220,426 Accrued salaries and benefits......................................................... 300,223 256,951 Accrued sales and other taxes......................................................... 89,581 84,545 Other current liabilities............................................................. 154,114 127,414 ------------ ------------ Total current liabilities........................................................... 2,094,635 1,771,594 LONG-TERM DEBT........................................................................ 765,421 1,229,221 DEFERRED INCOME TAXES AND OTHER LIABILITIES........................................... 37,030 60,902 ------------ ------------ Total liabilities................................................................... 2,897,086 3,061,717 ------------ ------------ MINORITY INTERESTS.................................................................... 89,271 72,346 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding.......................................................................... -- -- Common stock $.01 par value; 900,000,000 shares authorized; 210,796,000 and 196,436,000 shares issued and outstanding............................................ 2,108 1,964 Additional paid-in capital............................................................ 646,624 321,832 Accumulated foreign currency translation.............................................. (64,860) (71,883) Retained earnings..................................................................... 1,655,144 1,525,885 ------------ ------------ Total stockholders' equity.......................................................... 2,239,016 1,777,798 ------------ ------------ $ 5,225,373 $4,911,861 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. 12 COSTCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
12 WEEKS ENDED 24 WEEKS ENDED -------------------------- -------------------------- FEBRUARY 16, FEBRUARY 18, FEBRUARY 16, FEBRUARY 18, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ REVENUE Net sales................................................ $ 5,147,425 $ 4,606,070 $ 9,933,061 $ 8,901,932 Membership fees and other................................ 91,468 82,625 189,240 170,327 ------------ ------------ ------------ ------------ Total revenue.......................................... 5,238,893 4,688,695 10,122,301 9,072,259 OPERATING EXPENSES Merchandise costs........................................ 4,619,208 4,153,992 8,927,578 8,041,108 Selling, general and administrative...................... 436,036 391,943 862,140 777,916 Preopening expenses...................................... 6,087 5,970 16,284 15,420 Provision for impaired assets and warehouse closing costs.................................................. -- -- 70,000 -- ------------ ------------ ------------ ------------ Operating income....................................... 177,562 136,790 246,299 237,815 OTHER INCOME (EXPENSE) Interest expense......................................... (17,243) (17,501) (36,176) (35,272) Interest income and other................................ 3,461 2,287 7,119 3,378 ------------ ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES................. 163,780 121,576 217,242 205,921 Provision for income taxes............................... 66,331 50,150 87,983 84,942 ------------ ------------ ------------ ------------ NET INCOME............................................... $ 97,449 $ 71,426 $ 129,259(a) $ 120,979 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE--FULLY DILUTED: Net income............................................... $ 0.46 $ 0.35 $ 0.62(a) $ 0.59 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Shares used in calculation (000's)....................... 223,296 224,737 218,549 217,431 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
- ------------------------ (a) Net income and net income per common and common equivalent share would have been $167,934 and $0.79, respectively, without the effect of adopting FAS No. 121, using 225,822 fully-diluted shares. The accompanying notes are an integral part of these financial statements. 13 COSTCO COMPANIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
24 WEEKS ENDED -------------------------- FEBRUARY 16, FEBRUARY 18, 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................................................ $ 129,259 $ 120,979 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................................................... 79,909 71,963 Provision for asset impairments..................................................... 65,000 -- Decrease (increase) in merchandise inventories...................................... (155,362) 21,572 Increase (decrease) in accounts payable............................................. 96,502 (132,608) Other............................................................................... 32,438 8,153 ------------ ------------ Total adjustments................................................................. 118,487 (30,920) ------------ ------------ Net cash provided by operating activities........................................... 247,746 90,059 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment................................................... (285,113) (265,076) Proceeds from the sale of property and equipment...................................... 7,603 2,554 Investment in unconsolidated joint ventures........................................... -- (5,000) Other................................................................................. (8,029) (7,555) ------------ ------------ Net cash used in investing activities............................................... (285,539) (275,077) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowings............................................... 159,477 159,809 Increase (decrease) in bank checks outstanding........................................ (9,618) 7,604 Net proceeds from long-term borrowings................................................ 2,589 -- Payments on long-term debt and notes payable.......................................... (164,624) (1,413) Proceeds from minority interests, net................................................. 16,669 10,588 Exercise of stock options, including income tax benefit............................... 18,662 2,225 Other................................................................................. -- 331 ------------ ------------ Net cash provided by financing activities........................................... 23,155 179,144 ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................... 231 682 ------------ ------------ Net decrease in cash and cash equivalents........................................... (14,407) (5,192) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................ 101,955 45,688 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................ $ 87,548 $ 40,496 ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amounts capitalized) (a)........................................... $ 45,763 $ 22,670 Income taxes (b).................................................................... 65,400 104,714
- ------------------------ (a) Semi-annual interest payments on the 5 1/2% and 6 3/4% convertible debentures were paid on September 3, 1996, subsequent to the beginning of the first quarter of fiscal 1997, which began September 2, 1996. In fiscal year 1996, these interest payments were paid prior to the first quarter, which began on September 4, 1995. (b) The second quarter of fiscal 1997 estimated tax payments were due and paid subsequent to the end of the second quarter. In fiscal 1996, these payments were made prior to the end of the second quarter. The accompanying notes are an integral part of these financial statements. 14 COSTCO COMPANIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The unaudited consolidated financial statements include the accounts of Costco Companies, Inc., a Delaware corporation, and its subsidiaries ("Costco Companies, Inc." or the "Company"). Costco Companies, Inc. is a holding company which operates primarily through its major subsidiaries, The Price Company and subsidiaries ("Price"), and Costco Wholesale Corporation and subsidiaries ("Costco"). All intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation. Price and Costco primarily operate cash and carry membership warehouses, primarily under the "Costco Wholesale" name. Costco Companies, Inc. operates membership warehouses that offer very low prices on a limited selection of nationally-branded and selected private label products in a wide range of merchandise categories in no-frills, self-service warehouse facilities. As of February 16, 1997, Costco Companies, Inc. operated 258 warehouses under the "Costco Wholesale" and "Price Club" names: 198 warehouses in the United States (23 states), 54 warehouses in nine Canadian provinces, five warehouses in the United Kingdom, and one warehouse in Taiwan. As of February 16, 1997, the Company also operated (through a 50%-owned joint venture) 13 warehouses in Mexico and had a license agreement for the operation of a membership warehouse in Seoul, Korea. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission. While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report filed on Form 10-K for the fiscal year ended September 1, 1996. FISCAL YEARS The Company reports on a 52/53-week fiscal year, ending on the Sunday nearest the end of August. Fiscal 1997 is a 52-week fiscal year, with the first, second and third quarters consisting of 12 weeks each and the fourth quarter, ending August 31, 1997, consisting of 16 weeks. MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost or market as determined by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for U.S. merchandise inventories, and the first-in, first-out (FIFO) method for foreign merchandise inventories. If the FIFO method had been used, merchandise inventory would have been $21,150 higher at both February 16, 1997 and February 18, 1996. 15 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 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 to reflect the actual shrinkage results of physical inventory counts which generally occur in the second and fourth fiscal quarters. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding. The calculation for the 12- and 24-week periods ended February 16, 1997 and February 18, 1996, eliminates interest expense, net of income taxes, on the 5 1/2% convertible subordinated debentures (primary and fully diluted) prior to the December 4, 1996 redemption date, the 6 3/4% convertible subordinated debentures (fully diluted only) prior to the January 6, 1997 redemption date, and the 5 3/4% convertible subordinated debentures (fully diluted only), and includes the additional shares issuable upon conversion of these debentures. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121 The Company adopted Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " (SFAS No. 121), as of the first quarter of fiscal 1997. In accordance with SFAS No. 121, the Company recorded a pretax, non-cash charge of $65,000 reflecting its estimate of impairment relating principally to excess property and closed warehouses. The charge reflects the difference between carrying value and fair-market value, which was based on market valuations for those assets whose carrying value was not recoverable through future cash flows. RECENT ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 establishes new standards for computing and presenting earnings per share (EPS) for entities with publicly-held common stock. The Company is required to adopt SFAS No. 128 at the beginning of fiscal 1998. If the provisions of SFAS No. 128 had been used to calculate EPS for the 12- and 24-weeks ended February 16, 1997 and February 18, 1996, proforma EPS would have been:
12 WEEKS ENDED 24 WEEKS ENDED ---------------------------------------- ---------------------------------------- FEBRUARY 16, 1997 FEBRUARY 18, 1996 FEBRUARY 16, 1997 FEBRUARY 18, 1996 ------------------- ------------------- ------------------- ------------------- Basic.............. $ .47 $ .37 $ .64 $ .62 --- --- --- --- --- --- --- --- Diluted............ $ .46 $ .35 $ .62 $ .59 --- --- --- --- --- --- --- ---
RECLASSIFICATIONS Certain reclassifications have been reflected in the financial statements in order to conform prior years to the current year presentation. 16 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE (2)--DEBT BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS The Company has a domestic multiple-option loan facility with a group of 12 banks, which provides for borrowings of up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 26, 1998, and $250,000 expires on January 30, 2001. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At February 16, 1997, no amount was outstanding under the loan facility and $156,000 was outstanding under the commercial paper program. In addition, a wholly-owned Canadian subsidiary has a $148,000 commercial paper program supported by a $104,000 bank credit facility with three Canadian banks, of which $63,000 will expire in April 1997 and $41,000 will expire in April 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At February 16, 1997, no amount was outstanding under the bank credit facility and $63,000 was outstanding under the Canadian commercial paper program. The Company expects to renew for an additional one-year term the $63,000 portion of the loan facility expiring in April 1997, at substantially the same terms. The Company has agreed to limit the combined amount outstanding under the U.S. and Canadian commercial paper programs to the $604,000 combined amounts of the respective supporting bank credit facilities. LETTERS OF CREDIT The Company also has separate letter of credit facilities (for commercial and standby letters of credit), totaling approximately $179,000. The outstanding commitments under these facilities at February 16, 1997 totaled approximately $72,000, including approximately $37,000 in standby letters of credit for workers' compensation requirements. REDEMPTION/CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES On November 19, 1996, The Price Company, a wholly-owned subsidiary of the Company, called for redemption all $285,100 of its 6 3/4% Convertible Subordinated Debentures due 2001. On the redemption date, December 4, 1996, approximately $159,400 principal amount of the Debentures were converted into approximately 7.1 million shares of Costco Companies, Inc. Common Stock and the remaining $125,700 of Debentures were redeemed at a total cost of $130,300 (including accrued interest and redemption premium). The redemption portion of the transaction was financed with short-term bank borrowings. 17 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (2)--DEBT (CONTINUED) On December 16, 1996, The Price Company called for redemption all $179,300 of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption date, January 6, 1997, approximately $142,700 principal amount of the Debentures were converted into approximately 6.0 million shares of Costco Companies, Inc. Common Stock and the remaining $36,600 of Debentures were redeemed at a total cost of $37,500 (including accrued interest and redemption premium). The redemption portion of the transaction was paid with cash on hand. NOTE (3)--INCOME TAXES The following is a reconciliation of the federal statutory income tax rate to the effective income tax rate for income before income taxes:
24 WEEKS ENDED 24 WEEKS ENDED FEBRUARY 16, 1997 FEBRUARY 18, 1996 --------------------------- --------------------------- Federal statutory income tax rate...................... $76,035 35.00% $72,072 35.00% State, foreign and other income taxes, net............. 11,948 5.50% 12,870 6.25% ------------ ------------- ------------ ------------- $87,983 40.50% $84,942 41.25% ------------ ------------- ------------ ------------- ------------ ------------- ------------ -------------
NOTE (4)--COMMITMENTS AND CONTINGENCIES The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. See Legal Proceedings on page 8 for outstanding legal matters. 18 EX-3.A 2 RESTATED AND AMENDED CERTIFICATE OF INCORPORATION CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF PRICE/COSTCO, INC. Price/Costco, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That, in accordance with Section 141(f) of the General Corporation Law of the State of Delaware, the Board of Directors of Price/Costco, Inc. duly adopted by unanimous consent setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by striking Article FIRST in its entirety and replacing therefore: "FIRST: The name of the corporation is Costco Companies, Inc." SECOND: That, in accordance with Section 211 of the General Corporation Law of the State of Delaware, the stockholders of Price/Costco, Inc. duly adopted said amendment by a majority vote at the Company's annual meeting. THIRD: That said amendment was duly adopted in accordance with provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Price/Costco, Inc. has caused this Certificate to be signed by James D. Sinegal, its President, and by Joel Benoliel, its Secretary, this 3rd day of February, 1997. BY: /s/ James D. Sinegal ----------------------------------------- James D. Sinegal, President ATTEST: /s/ Joel Benoliel ------------------------------------- Joel Benoliel, Secretary RESTATED CERTIFICATE OF INCORPORATION OF COSTCO COMPANIES, INC. FIRST: The name of the Corporation is Costco Companies, Inc. (hereinafter the "Corporation"). SECOND: The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware (the "GCL"). FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 1,000,000,000, which shall consist of 900,000,000 shares of Common Stock, each having a par value of one penny ($.01) (the "Common Stock") and 100,000,000 shares of Preferred Stock, each having a par value of one penny ($.01) (the "Preferred Stock"). The Board of Directors is hereby authorized from time to time to provide by resolution for the issuance of shares of Preferred Stock in one or more series not exceeding in the aggregate the number of shares of Preferred Stock authorized by this Certificate of Incorporation, as amended from time to time; and to determine with respect to each such series the voting powers, if any (which voting powers, if granted, may be full or limited), designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions relating thereto, including without limiting the generality of the foregoing, the voting rights relating to shares of Preferred Stock of any series (which may be one or more votes per share or a fraction of a vote per share, which may vary over time and which may be applicable generally or only upon the happening and continuance of stated events or conditions), the rate of dividend to which holders of Preferred Stock of any series may be entitled (which may be cumulative or noncumulative), the rights of holders of Preferred Stock of any series in the event of liquidation, dissolution or winding up of the affairs of the Corporation, the rights, if any, of holders of Preferred Stock of any series to convert or exchange such shares of Preferred Stock or such series for shares of any other class or series of capital stock or for any other securities, property or assets of the Corporation or any subsidiary (including the determination of the price or prices or the rate or rates applicable to such rights to convert or exchange and the adjustment thereof, the time or times during which the right to convert or exchange shall be applicable and the time or times during which a particular price or rate shall be applicable), whether or not the shares of that series shall be redeemable and, if so, the terms and conditions of such redemption, including 1 the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates, and whether any shares of that series shall be redeemed pursuant to a retirement or sinking fund or otherwise and the terms and conditions of such obligation. Before the Corporation shall issue any shares of Preferred Stock of any series, a certificate setting forth a copy of the resolution or resolutions of the Board of Directors, fixing the voting powers, designations, preferences, the relative, participating optional or other rights, if any, and the qualifications, limitations and restrictions if any, relating to the shares of Preferred Stock of such series, and the number of shares of Preferred Stock of such series authorized by the Board of Directors to be issued shall be made under seal of the Corporation and signed by and shall be filed and a copy thereof recorded in the manner prescribed by the GCL. The Board of Directors is further authorized to increase or decrease (but not below the number of such shares of such series then outstanding) the number of shares of any series subsequent to the issuance of the shares of that series. FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: (a) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. (b) The directors shall have concurrent power with the stockholders to make, alter, amend, change, add to or repeal the Bylaws of the Corporation. (c) The number of directors of the Corporation shall be as from time to time fixed by, or in the manner provided in, the Bylaws of the Corporation. Election of directors need not be by written ballot unless the Bylaws so provide. (d) In addition to the powers and authority herein before or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the GCL, this Certificate of Incorporation, and any Bylaws adopted by the stockholders; PROVIDED, HOWEVER, that no Bylaws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such Bylaws had not been adopted. SIXTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the GCL) outside the State of Delaware at such 2 place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. SEVENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statues, and all rights conferred upon stockholders herein are granted subject to this reservation. EIGHTH: The directors shall be divided into three classes, designated as Class I, Class II and Class III. Initially, Class I directors shall be elected for a one-year term, Class II directors for a two-year term and Class III directors for a three-year term. At any annual meeting of stockholders held during or after 1994, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so the number of directors in each class is as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which such director's term expires and until such director's successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Unless the Bylaws of the Corporation provide otherwise, any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board of Directors may be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of such director's predecessor. NINTH: Notwithstanding anything else contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 662/3 percent of the combined voting power of all of the Voting Stock, voting together as a single class, shall be required to alter, amend, rescind or repeal Article EIGHTH of this Certificate of Incorporation. "Voting Stock" shall mean the securities of the Corporation which are entitled to vote generally for the election of directors of the Corporation. TENTH: (a) Subject to Article TENTH (c), the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation or a Predecessor Corporation (as hereinafter defined), or is or was serving at the request of the 3 Corporation or a Predecessor Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan of other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the Corporation or such Predecessor Corporation (as the case may be), and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, or itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation or such Predecessor Corporation (as the case may be), and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) Subject to Article TENTH (c), the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation or Predecessor Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation or a Predecessor Corporation, or is or was serving at the request of the Corporation or a Predecessor Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation or such Predecessor Corporation (as the case may be); except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation or such Predecessor Corporation (as the case may be) unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) Any indemnification under this Article TENTH (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Article TENTH (a) or Article TENTH (b), as the case may be. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, event if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the 4 stockholders. To the extent, however, that a present or former director or officer or the Corporation or a Predecessor Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Article TENTH (a) or Article TENTH (b), or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case. (d) Notwithstanding any contrary determination in the specific case under Article TENTH (c), and notwithstanding the absence of any determination thereunder, any present or former director or officer of the Corporation or a Predecessor Corporation may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Article TENTH (a) and Article TENTH (b). The basis of such indemnification by a court shall be a determination by such court that indemnification of such person is proper in the circumstances because he has met the applicable standards of conduct set forth in Article TENTH (a) or Article TENTH (b), as the case may be. Neither a contrary determination in the specific case under Article TENTH (c) nor the absence of any determination thereunder shall be a defense to such application or create a presumption that such person seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Article TENTH (d) shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, such person seeking indemnification shall also be entitled to be paid the expense of prosecuting such application. (e) Expenses incurred by a person who is or was a director or officer of the Corporation or a Predecessor Corporation in defending or investigation a threatened or pending action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article TENTH. (f) The indemnification and advancement of expenses provided by or granted pursuant to this Article TENTH shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Article TENTH (a) and Article TENTH (b) shall be made to the fullest extent permitted by law. The provisions of this Article TENTH shall not be deemed to preclude the indemnification of any person who is not specified in Article TENTH (a) or Article TENTH (b) but 5 whom the Corporation has the power or obligation to indemnify under the provisions of the GCL, or otherwise. (g) The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation or a Predecessor Corporation, or is or was serving at the request of the Corporation or a Predecessor Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article TENTH or of Section 145 of the GCL. (h) For purposes of this Article TENTH, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if it separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article TENTH with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article TENTH, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation or a Predecessor Corporation" shall include any service as a director, officer, employee or agent of the Corporation or a Predecessor Corporation which imposes duties on, or involves services by, such person with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation or such Predecessor Corporation" as referred to in this Article TENTH. For purposes of this Article TENTH, a "Predecessor Corporation" shall mean The Price Company, a California corporation, and Costco Wholesale Corporation, a Washington corporation, in each case, as such corporation existed prior to the Effective Time (as defined in the Agreement and Plan or Reorganization dated as of June 15, 1993 by and among the Corporation, The Price Company and Costco Wholesale Corporation). For purposes of any determination under Article TENTH (c), a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to him by the officers of the Corporation or another 6 enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Article TENTH (h) shall mean any other corporation of any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provisions of this Article TENTH (h) shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Article TENTH (a) or (b), as the case may be. (i) The indemnification and advancement of expenses provided by, or granted pursuant to, this Article TENTH shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer of the Corporation or a Predecessor Corporation and shall inure to the benefit of the heirs, executors and administrators of such a person. (j) Notwithstanding anything contained in this Article TENTH to the contrary, except for proceedings to enforce rights to indemnification ( which shall be governed by Article TENTH (d)), the Corporation shall not be obligated to indemnify any person in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the corporation or a Predecessor Corporation. (k) The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article TENTH to directors and officers of the Corporation. ELEVENTH: No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the GCL or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article ELEVENTH by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. 7 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS AUG-31-1997 SEP-02-1996 FEB-16-1997 87,548 0 171,705 3,840 1,660,210 1,993,961 3,761,759 720,382 5,225,373 2,094,635 765,421 0 0 648,732 1,590,284 5,225,373 9,933,061 10,122,301 8,927,578 9,876,002 0 0 36,176 217,242 87,983 129,259 0 0 0 129,259 .62 .62
EX-28 4 EXHIBIT 28 EXHIBIT 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Costco Companies, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Costco Companies, Inc. (a Delaware corporation) and subsidiaries as of February 16, 1997, and the related condensed consolidated statements of operations for the twelve-week and twenty-four-week periods ended February 16, 1997 and February 18, 1996, and the condensed consolidated statements of cash flows for the twenty-four-week periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Seattle, Washington March 11, 1997 19 -----END PRIVACY-ENHANCED MESSAGE-----