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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 13, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20355
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COSTCO WHOLESALE CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1223280
(State or other jurisdiction (I.R.S.Employer
of Identification No.)
incorporation or organization)
999 LAKE DRIVE, ISSAQUAH, WA 98027
(Address of principal executive office)
(Zip Code)
(Registrant's telephone number, including area code): (425) 313-8100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock $.005 Par Value The Nasdaq National Market
------------------------
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 446,760,866 common shares, par value $.005, outstanding
at March 10, 2000.
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COSTCO WHOLESALE CORPORATION
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
PAGE
--------
ITEM 1--FINANCIAL STATEMENTS................................ 3
Condensed Consolidated Balance Sheets..................... 10
Condensed Consolidated Statements of Operations........... 11
Condensed Consolidated Statements of Cash Flows........... 12
Notes to Condensed Consolidated Financial Statements...... 13
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..................... 8
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 8
ITEM 5--OTHER INFORMATION................................... 9
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.................... 9
Exhibit (3.2) Bylaws of Costco Wholesale Corporation
Exhibit (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants..... 19
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Wholesale Corporation's ("Costco" or the "Company") unaudited
condensed consolidated balance sheet as of February 13, 2000, and the condensed
consolidated balance sheet as of August 29, 1999, unaudited condensed
consolidated statements of operations and cash flows for the 12- and 24-week
periods ended February 13, 2000 and February 14, 1999 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 2000 is a
53-week year ending on September 3, 2000. The first, second, and third quarters
consist of 12 weeks each and the fourth quarter consists of 17 weeks.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this document constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. For these purposes, forward-looking statements are statements that address
activities, events, conditions or developments that the company expects, or
anticipates may occur in the future. Such forward-looking statements involve
risks and uncertainties that may cause actual events, results or performance to
differ materially from those indicated by such statements. These risks and
uncertainties include, but are not limited to, domestic and international
economic conditions including exchange rates, the effects of competition and
regulation, conditions affecting the acquisition, development and ownership or
use of real estate, actions of vendors and other risks identified from time to
time in the Company's reports filed with the SEC.
It is suggested that this management discussion be read in conjunction with
the management discussion included in the Company's fiscal 1999 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
The Company's Board of Directors approved a 2-for-1 stock split of Costco
Common Stock whereby shareholders received one additional share of common stock
for every share held on the record date of December 24, 1999. The common stock
began trading at a post-split price on January 14, 2000, and all per share data
reflects this 2-for-1 stock split.
COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 13, 2000 AND FEBRUARY 14, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the second quarter of fiscal 2000 increased 19% to $181,608,
or $0.39 per diluted share, from $152,032, or $0.33 per diluted share, during
the second quarter of fiscal 1999.
Net sales increased 17% to $7,613,601 during the second quarter of fiscal
2000, from $6,484,445 during the second quarter of fiscal 1999. This increase
was due to opening a net of 18 new warehouses (24 opened, 6 closed) since the
end of the second quarter of fiscal 1999 and an increase in comparable warehouse
sales. Comparable sales, that is sales in warehouses open for at least a year,
increased 14% during the second quarter of fiscal 2000, reflecting new marketing
and merchandising efforts, including the rollout of 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 14% to $123,386 or 1.62% of net
sales in the second quarter of fiscal 2000 from $107,913 or 1.66% of net sales
in the second quarter of fiscal 1999. Membership fees include new membership
sign-ups at the new warehouses opened since the end of the second quarter of
fiscal 1999. Membership fees in both fiscal years reflect the change from a cash
to a deferred method of
3
accounting for membership fees, beginning in the first quarter of fiscal 1999,
whereby membership fee income is recognized ratably over the one-year life of
the membership.
Gross margin (defined as net sales minus merchandise costs) increased 18% to
$821,234 or 10.79% of net sales in the second quarter of fiscal 2000 from
$695,792 or 10.73% of net sales in the second quarter of fiscal 1999.The
increase in gross margin as a percentage of net sales reflects increased sales
penetration of certain higher gross margin ancillary businesses and private
label products and improved performance of its international operations, offset
by the Company's on-going efforts to continually lower prices to its members.
The gross margin figures reflect accounting for merchandise costs on the
last-in, first-out (LIFO) method. The second quarter of fiscal 2000 includes a
$2,500 LIFO provision compared to a $3,500 LIFO provision in the second quarter
of fiscal 1999.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.36% during the second quarter of fiscal 2000 from 8.38% during
the second quarter of fiscal 1999. 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 expense improvement
at the Company's core warehouse operations and Central and Regional
administrative offices, which was partially offset by higher expenses associated
with international expansion; continued expansion and rollout of certain
ancillary businesses; the opening of a new regional buying office and the
increase in credit card discount fees associated with the rollout of a new
co-branded credit card program.
Preopening expenses totaled $8,108 or .11% of net sales during the second
quarter of fiscal 2000 compared to $3,951 or 0.06% of net sales during the
second quarter of fiscal 1999. Six warehouses were opened in the second quarter
of fiscal 2000 compared to one warehouse opened during last year's second
quarter. Additionally, the opening of a Southeast Regional Office to strengthen
the administrative support of the region contributed to this increase.
Preopening expenses also include costs related to remodels, including expanded
fresh foods and ancillary operations at existing warehouses, as well as costs
associated with expanding international operations.
A provision for warehouse closing costs of $1,500 was recorded in the second
quarter of fiscal 2000 compared to $3,000 in the second quarter of fiscal 1999.
The provisions include actual and estimated closing costs for warehouses being
relocated to new facilities during the fiscal year.
Interest expense totaled $10,576 in the second quarter of fiscal 2000
compared to $10,995 in the second quarter of fiscal 1999. Interest expense
primarily includes interest on the 3 1/2% Zero Coupon Notes and the 7 1/8%
Senior Notes. The decrease in interest expense is primarily attributable to a
decrease in the interest rate related to the 7 1/8% Senior Notes, due to
entering into a "fix-to-floating" interest rate swap agreement on December 10,
1999 that effectively converted the fixed rate of 7 1/8% to a floating rate
indexed to the thirty day commercial paper rate.
Interest income and other totaled $14,983 in the second quarter of fiscal
2000 compared to $11,192 in the second quarter of fiscal 1999. The increase
primarily reflects higher rates of interest earned on higher balances of cash
and cash equivalents and short-term investments during the second quarter of
fiscal 2000, as compared to the second quarter of fiscal 1999.
The effective income tax rate on earnings in the second quarter of both
fiscal 2000 and 1999 was 40%.
COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 13, 2000 AND FEBRUARY 14, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first half of fiscal 2000 reflect net income
of $310,926, or $0.66 per diluted share, compared to net income of $138,243, or
$0.30 per diluted share during the first half of fiscal 1999. Net income in the
first half of fiscal 1999 included a $118,023 non-cash, after-tax charge,
reflecting the cumulative effect of the Company's change in accounting for
membership fees from a cash to a
4
deferred method. Before the impact of this non-cash charge, net earnings were
$256,266, or $.55 per diluted share.
Net sales increased 17% to $14,437,798 during the first half of fiscal 2000
from $12,378,683 during the first half of fiscal 1999. This increase was
primarily due to an increase in comparable warehouse sales and opening a net of
18 warehouses (24 opened, 6 closed) since the end of the second quarter of
fiscal 1999. Comparable sales, that is sales in warehouses open for at least a
year, increased 13 percent during the first half of fiscal 2000, reflecting new
marketing and merchandising efforts, including the rollout of fresh foods and
various ancillary businesses to certain existing locations. Changes in prices of
merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased to $242,701 or 1.68% of net
sales in the first half of fiscal 2000 from $211,753 or 1.71% of net sales in
the first half of fiscal 1999. Membership fees include new membership sign-ups
at the new warehouses opened since the end of the second quarter of fiscal 1999.
Gross margin (defined as net sales minus merchandise costs) increased 17% to
$1,525,230 or 10.56% of net sales in the first half of fiscal 2000 from
$1,302,245 or 10.52% of net sales in the first half of fiscal 1999. The increase
in gross margin as a percentage of net sales reflects increased sales
penetration of certain higher gross margin ancillary businesses and private
label products and improved performance of its international operations, offset
by the Company's on-going efforts to continually lower prices to its members.
The gross margin figures reflect accounting for merchandise costs on the
last-in, first-out (LIFO) method. The first half of fiscal 2000 includes a
$5,000 LIFO provision compared to a $6,000 LIFO provision in the first half of
fiscal 1999.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.54% during the first half of fiscal 2000 from 8.58% during the
first half of fiscal 1999. 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 expense improvement
at the Company's core warehouse operations and Central and Regional
administrative offices, which was partially offset by higher expenses associated
with international expansion and continued expansion and rollout of certain
ancillary businesses; the opening of a new regional buying office and the
increase in credit card discount fees associated with the rollout of a new
co-branded credit card program.
Preopening expenses totaled $18,442 or 0.13% of net sales during the first
half of fiscal 2000 compared to $14,658 or 0.12% of net sales during the first
half of fiscal 1999. Twelve warehouses were opened in the first half of fiscal
2000 (including 1 relocated warehouses) compared to nine new locations during
the last year's first half (including two relocated warehouses). Preopening
expenses also include costs related to remodels, including expanded fresh foods
and ancillary operations at existing warehouses, as well as costs associated
with expanding international operations.
In the first half of fiscal 2000, the Company recorded a pre-tax provision
for warehouse closing costs of $2,500 compared to a pre-tax provision for
warehouse closing costs of $5,000 in the first half of fiscal 1999. The
provisions included closing costs for warehouses closed in each respective
fiscal year, including exit costs associated with warehouses which were or are
being relocated to new facilities. There was one relocation in the first half of
fiscal 2000 compared to two relocations in the first half of fiscal 1999.
Interest expense totaled $20,973 in the first half of fiscal 2000 compared
to $21,907 in the first half of fiscal 1999. Interest expense primarily includes
interest on the 3 1/2% Zero Coupon Notes and the 7 1/8% Senior Notes. The
decrease in interest expense is primarily attributable to a decrease in the
interest rate related to the 7 1/8% Senior Notes, due to entering into a
"fix-to-floating" interest rate swap agreement on December 10, 1999 that
effectively converted the fixed rate of 7 1/8% to a floating rate indexed to the
thirty day commercial paper rate.
Interest income and other totaled $25,650 in the first half of fiscal 2000
compared to $17,231 in the first half of fiscal 1999. The increase primarily
reflects higher interest rates earned on higher balances of
5
cash and cash equivalents and short-term investments during the first half of
fiscal 1999, as compared to the year-earlier first half.
The effective income tax rate on earnings in the first half of both fiscal
2000 and 1999 was 40.0%.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
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 either directly or 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 $800,000 to $950,000 during
fiscal 2000 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $100,000 to $150,000 for international expansion, including the
United Kingdom, Asia, Mexico and other potential ventures. These expenditures
will be financed with a combination of cash provided from operations, the use of
cash and cash equivalents and short-term investments (which totaled $663,502 at
February 13, 2000), short-term borrowings under revolving credit facilities and
other financing sources as required.
Expansion plans for the United States and Canada during fiscal 2000 are to
open approximately 20 to 25 new warehouse clubs, including three to five
relocations of existing warehouses to larger and better-located facilities. The
Company expects to continue expansion of its international operations and plans
to open two to three additional units in the United Kingdom through its
60%-owned subsidiary and an additional unit in Taiwan through its 55%-owned
subsidiary during the year. Through the end of the first half of fiscal 2000,
the Company opened 12 new warehouses (including one relocation). Expansion plans
for the remainder of fiscal 2000 include 10 to 14 new openings in the U.S. and
Canada (including two to four relocations) and two to three warehouses in the
United Kingdom. Other international markets are being assessed.
Costco and its Mexico-based joint venture partner, Controladora Comercial
Mexicana, each own a 50% interest in Price Club Mexico. As of February 13, 2000,
Price Club Mexico operated 17 warehouses in Mexico and plans to open two new
warehouse clubs during fiscal 2000.
BANK CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN
US DOLLARS)
The Company has in place a $425,000 commercial paper program supported by a
$425,000 bank credit facility with a group of 11 banks, which expires in
January, 2001. At February 13, 2000 no amounts were outstanding under the loan
facility or the commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $138,000 commercial
paper program supported by a $97,000 bank credit facility with three Canadian
banks, which expires in March 2001. At February 13, 2000 no amounts were
outstanding under the bank credit facility or the Canadian commercial paper
program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $522,000 combined amounts of
the respective supporting bank credit facilities.
6
LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit) totaling approximately $287,000. The outstanding
commitments under these facilities at February 13, 2000 totaled approximately
$122,000, including approximately $45,000 in standby letters of credit.
DERIVATIVES
The Company uses derivative financial instruments only to manage
well-defined interest rate and foreign exchange risks. Forward foreign exchange
contracts are used to hedge the impact of fluctuations of foreign exchange on
inventory purchases. The amount of interest rate and foreign exchange contracts
outstanding at quarter-end or in place during the first 24 weeks of fiscal 2000
were not material to the Company's results of operations or its financial
position.
Effective December 10, 1999, the Company entered into a "fixed-to-floating"
interest rate swap agreement on its $300 million 7 1/8% senior notes, replacing
the fixed interest rate with a floating rate indexed to the 30-day commercial
paper rate.
YEAR 2000
The Company implemented a project to ensure that its systems were year 2000
compliant and fully operational prior to the year 2000 and on into the 21(st)
Century. Virtually all systems--including information technology systems and
non-information technology equipment--have worked properly in the year 2000
without any significant operational difficulties. In addition, the Company has
not experienced any material year 2000-related problems with its significant
suppliers with which its systems interface or exchange data. The total costs
related to the year 2000 efforts were approximately $7,500--in line with prior
estimates and were fully expensed as incurred during the relevant fiscal
periods.
FINANCIAL POSITION AND CASH FLOWS
Working capital totaled approximately $447,000 at February 13, 2000 compared
to $450,000 at August 29, 1999. Working capital was positively affected by an
increase in net inventory levels (inventories less accounts payable) of $73,000,
an increase in receivables of $18,000 and an increase in other current assets of
$59,000, which increases were offset by a decrease in cash and cash equivalents
and short-term investments of $34,000, an increase in deferred membership income
of $29,000 (the result of accounting for membership fees on a deferred basis),
and an increase in tax accruals and other current liabilities of $90,000.
Net cash provided by operating activities totaled $408,453 in the first half
of fiscal 2000 and $424,294 in the first half of fiscal 1999. The year-over-year
decrease in net cash from operating activities is primarily a result of
increased net income, adjusted for the non-cash cumulative effect of accounting
change in fiscal 1999, during the first 24 weeks of fiscal 2000 compared to the
first 24 weeks of fiscal 1999, offset by a reduction in the change in net
receivables, other current assets and accrued and other current liabilities.
Net cash used in investing activities totaled $397,418 in the first half of
fiscal 2000 compared to $571,942 in the first half of fiscal 1999. The investing
activities primarily relate to additions to property and equipment for new and
remodeled warehouses of $515,118 and $367,075 in the first 24 weeks of fiscal
2000 and 1999, respectively. The Company opened 12 warehouses (including one
relocation) in the first 24 weeks of fiscal 2000 and has plans to open 15 to 17
new warehouses (including two to four relocations) during the remainder of the
fiscal year compared to 21 new warehouses (including seven relocations) opened
during fiscal 1999. Net cash used in investing activities also reflects a
decrease in short-term investments of $103,587 since the beginning of fiscal
year 2000 compared to an increase of $228,361 in the first half of fiscal 1999.
7
Net cash provided by financing activities totaled $53,745 in the first half
of fiscal 2000 compared to $106,543 in the first half of fiscal 1999. This
decrease is primarily attributable to a decrease in bank checks outstanding.
The Company's balance sheet as of February 13, 2000 reflects a $603,345 or
8% increase in total assets since August 29, 1999. The increase is primarily due
to increases in merchandise inventory and property and equipment primarily
related to the Company's expansion program.
PART II--OTHER INFORMATION
(DOLLARS IN THOUSANDS)
ITEM 1. LEGAL PROCEEDINGS
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 its operations.
ITEM 2. CHANGES IN SECURITIES
None.
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 27, 2000 at
the Doubletree Hotel in Bellevue, Washington. Stockholders of record at the
close of business on December 10, 1999 were entitled to notice of and to vote in
person or by proxy at the annual meeting. At the date of record, December 10,
1999, there were 222,387,354 shares outstanding. The matters presented for vote
received the required votes for approval and had the following total, for,
against and abstained votes as noted below. The number of shares voted does not
reflect the 2-for-1 stock split, which was approved by the Company's Board of
Directors for shareholders of record on December 24, 1999, because the date of
record for those entitled to vote preceded the stock split record date.
(1) To elect three Class I directors to hold office until the 2003 Annual
Meeting of Stockholders and until their successors are elected and
qualified.
TOTAL SHARES FOR AGAINST WITHHELD AUTHORITY AND
VOTED/(%) VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
------------ ----------- --------- ----------------------
Jeffrey H. Brotman 175,087,870 172,259,356 -- 2,828,514
(Class I) 78.73% 98.38% -- 1.62%
Richard A. Galanti 175,087,870 172,241,114 -- 2,846,756
(Class I) 78.73% 98.37% -- 1.63%
James D. Sinegal 175,087,870 172,255,855 -- 2,832,015
(Class I) 78.73% 98.38% -- 1.62%
8
(2) To consider and approve indemnity agreements to be entered into between
the Company and each of its directors and certain of its executive
officers.
TOTAL SHARES FOR AGAINST WITHHELD AUTHORITY AND
VOTED/(%) VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
------------ ----------- ----------- ----------------------
175,087,870 133,658,428 40,476,052 953,390
78.73% 76.34% 23.12% .54%
(3) To consider and ratify the selection of the Company's independent public
accountants, Arthur Andersen LLP.
TOTAL SHARES FOR AGAINST WITHHELD AUTHORITY AND
VOTED/(%) VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
------------ ----------- ----------- ----------------------
175,087,870 173,303,280 103,106 1,681,484
78.73% 98.98% .06% .96%
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(3.2) Bylaws of Costco Wholesale Corporation
(27) Financial Data Schedule
(28) Report of Independent Public Accountants
(b) Current report on Form 8-K filed December 9, 1999.
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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 Wholesale Corporation
REGISTRANT
Date: March 10, 2000 /s/ JAMES D. SINEGAL
---------------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 10, 2000 /s/ RICHARD A. GALANTI
---------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
9
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
FEBRUARY 13, AUGUST 29,
2000 1999
------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 510,027 $ 440,586
Short-term investments.................................... 153,475 256,688
Receivables, net.......................................... 186,491 168,648
Merchandise inventories, net.............................. 2,347,621 2,210,475
Other current assets...................................... 298,289 239,516
----------- -----------
Total current assets.................................... 3,495,903 3,315,913
----------- -----------
PROPERTY AND EQUIPMENT
Land and land rights...................................... 1,442,075 1,264,125
Buildings and leasehold and land improvements............. 2,733,609 2,444,640
Equipment and fixtures.................................... 1,230,888 1,138,568
Construction in progress.................................. 122,638 176,824
----------- -----------
5,529,210 5,024,157
Less-accumulated depreciation and amortization............ (1,213,436) (1,117,269)
----------- -----------
Net property and equipment.............................. 4,315,774 3,906,888
----------- -----------
OTHER ASSETS................................................ 296,669 282,200
----------- -----------
$ 8,108,346 $ 7,505,001
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 1,976,294 $ 1,912,632
Accrued salaries and benefits............................. 431,989 414,276
Accrued sales and other taxes............................. 136,367 122,932
Deferred membership income................................ 255,327 225,903
Other current liabilities................................. 249,342 190,490
----------- -----------
Total current liabilities............................... 3,049,319 2,866,233
LONG-TERM DEBT.............................................. 923,414 918,888
DEFERRED INCOME TAXES AND OTHER LIABILITIES................. 68,805 66,990
----------- -----------
Total liabilities....................................... 4,041,538 3,852,111
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................................... 129,574 120,780
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock $.005 par value; 200,000,000 shares
authorized; no shares issued and outstanding............ -- --
Common stock $.005 par value; 1,800,000,000 shares
authorized; 446,401,000 and 442,736,000 shares issued
and outstanding......................................... 2,232 2,214
Additional paid-in capital................................ 1,015,062 952,758
Other accumulated comprehensive loss...................... (86,208) (118,084)
Retained earnings......................................... 3,006,148 2,695,222
----------- -----------
Total stockholders' equity.............................. 3,937,234 3,532,110
----------- -----------
$ 8,108,346 $ 7,505,001
=========== ===========
The accompanying notes are an integral part of these balance sheets
10
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
12 WEEKS ENDED 24 WEEKS ENDED
--------------------------- ---------------------------
FEBRUARY 13, FEBRUARY 14, FEBRUARY 13, FEBRUARY 14,
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUE
Net sales................................... $7,613,601 $6,484,445 $14,437,798 $12,378,683
Membership fees and other................... 123,386 107,913 242,701 211,753
---------- ---------- ----------- -----------
Total revenue............................. 7,736,987 6,592,358 14,680,499 12,590,436
OPERATING EXPENSES
Merchandise costs........................... 6,792,367 5,788,653 12,912,568 11,076,438
Selling, general and administrative......... 636,739 543,565 1,233,456 1,062,555
Preopening expenses......................... 8,108 3,951 18,442 14,658
Provision for impaired assets and warehouse
closing costs............................. 1,500 3,000 2,500 5,000
---------- ---------- ----------- -----------
Operating income.......................... 298,273 253,189 513,533 431,785
OTHER INCOME (EXPENSE)
Interest expense............................ (10,576) (10,995) (20,973) (21,907)
Interest income and other................... 14,983 11,192 25,650 17,231
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE............... 302,680 253,386 518,210 427,109
Provision for income taxes.................. 121,072 101,354 207,284 170,843
---------- ---------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE......................... 181,608 152,032 310,926 256,266
Cumulative effect of accounting change, net
of tax.................................... -- -- -- (118,023)
---------- ---------- ----------- -----------
NET INCOME.................................. $ 181,608 $ 152,032 $ 310,926 $ 138,243
========== ========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic earnings per share:
Income before cumulative effect of
accounting change..................... $ 0.41 $ 0.35 $ 0.70 $ 0.59
Cumulative effect of accounting change,
net of tax............................ -- -- -- (0.27)
---------- ---------- ----------- -----------
Net Income.............................. $ 0.41 $ 0.35 $ 0.70 $ 0.32
========== ========== =========== ===========
Diluted earnings per share:
Income before cumulative effect of
accounting change..................... $ 0.39 $ 0.33 $ 0.66 $ 0.55
Cumulative effect of accounting change,
net of tax............................ -- -- -- (.25)
---------- ---------- ----------- -----------
Net Income.............................. $ 0.39 $ 0.33 $ 0.66 $ .30
========== ========== =========== ===========
Shares used in calculation (000's)
Basic..................................... 445,255 437,782 444,277 436,730
Diluted................................... 476,642 470,453 475,120 468,787
The accompanying notes are an integral part of these financial statements.
11
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
24 WEEKS ENDED
---------------------------
FEBRUARY 13, FEBRUARY 14,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 310,926 $ 138,243
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 114,424 98,493
Accretion of discount on zero coupon notes.............. 7,431 7,586
Cumulative effect of accounting change, net of tax...... -- 118,023
Change in receivables, other current assets, accrued and
other current liabilities............................. 66,124 154,424
Increase in merchandise inventories..................... (124,369) (130,368)
Increase in accounts payable............................ 42,373 49,150
Other................................................... (8,456) (11,257)
--------- ---------
Total adjustments..................................... 97,527 286,051
--------- ---------
Net cash provided by operating activities............... 408,453 424,294
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment....................... (515,118) (367,075)
Proceeds from the sale of property and equipment.......... 33,738 30,101
Change in short-term investments.......................... 103,587 (228,361)
Other..................................................... (19,625) (6,607)
--------- ---------
Net cash used in investing activities................... (397,418) (571,942)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from long-term borrowings.................... 253 2,807
Repayments of long-term debt.............................. (5,473) (5,517)
Changes in bank checks outstanding........................ 10,608 70,793
Proceeds from minority interests.......................... 8,816 5,277
Exercise of stock options................................. 39,541 33,183
--------- ---------
Net cash provided by financing activities............... 53,745 106,543
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 4,661 3,730
--------- ---------
Net increase/(decrease) in cash and cash equivalents...... 69,441 (37,375)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 440,586 361,974
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 510,027 $ 324,599
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized)..................... $ 14,531 $ 14,193
Income taxes.............................................. 118,559 108,393
The accompanying notes are an integral part of these financial statements
12
COSTCO WHOLESALE CORPORATION
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 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 August 29, 1999.
The consolidated financial statements include the accounts of Costco
Wholesale Corporation, a Washington corporation, and its subsidiaries ("Costco"
or the "Company"). All inter-company transactions between the Company and its
subsidiaries have been eliminated in consolidation. The Price Company and Costco
Wholesale Corporation primarily operate membership warehouses under the Costco
Wholesale name.
Costco 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. At February 13, 2000, Costco operated 303 warehouse clubs: 230 in
the United States; 59 in Canada; seven in the United Kingdom; three in Korea;
three in Taiwan; and one in Japan. As of February 13, 2000, the Company also
operated (through a 50%-owned joint venture) 17 warehouses in Mexico. The
Company also operates Costco Online, an electronic commerce web site, at
www.costco.com.
The Company's investment in the Price Club Mexico joint venture and in other
unconsolidated joint ventures that are less than majority owned are accounted
for under the equity method.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year basis, which ends on the
Sunday nearest August 31(st). Fiscal year 2000 is a 53-week year, with the
first, second and third quarters consisting of 12 weeks each and the fourth
quarter, ending September 3, 2000, consisting of 17 weeks. Fiscal year 1999 was
a 52-week year.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
13
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS
At February 13, 2000 and August 29, 1999 short term investments consisted of
the following:
FEBRUARY 13, 2000 AUGUST 29, 1999
----------------- ---------------
Municipal securities........................... $ 41,154 $ 97,966
Corporate notes and bonds...................... 85,442 89,872
U.S. Treasury/Agency securities................ 21,738 43,699
Certificates of deposit........................ -- 24,841
Foreign Bonds.................................. 4,943 --
Other.......................................... 198 310
-------- --------
Total short-term investments................. $153,475 $256,688
======== ========
The Company's short-term investments have been designated as being
available-for-sale. The fair market value of short-term investments approximates
their carrying value and unrealized holding gains and losses were not
significant at February 13, 2000 or August 29, 1999. Realized gains and losses
are included in interest income and were not significant in the first half of
fiscal 2000 or 1999.
RECEIVABLES
Receivables consist primarily of vendor rebates and promotional allowances
and other miscellaneous amounts due to the Company, and are net of allowance for
doubtful accounts of $4,373 and $4,582 at February 13, 2000 and August 29, 1999.
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 substantially all U.S. merchandise
inventories. The Company believes the LIFO method more fairly presents the
results of operations by more closely matching current costs with current
revenues. If all merchandise inventories had been valued using the first-in,
first-out (FIFO) method, inventories would have been higher by $16,150 at
February 13, 2000 and $11,150 at August 29, 1999. 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.
ACCOUNTS PAYABLE
The Company's banking system provides for the daily replenishment of major
bank accounts as checks are presented. Accordingly, included in Accounts Payable
are $32,138 and $21,081 at February 13, 2000 and August 29, 1999, respectively,
representing the excess of outstanding checks over cash on deposit at the banks
on which the checks were drawn.
14
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MEMBERSHIP FEES
Membership fee revenue represents annual membership fees paid by
substantially all of the Company's members. Effective with the first quarter of
fiscal 1999, the Company changed its method of accounting for membership fee
income from a "cash basis" to a "deferred basis" whereby membership fee income
is recognized ratably over the one-year life of the membership. The change to
the deferred method of accounting for membership fees resulted in a one-time,
non-cash, pre-tax charge of approximately $196,705 ($118,023 after-tax, or $.25
per diluted share) to reflect the cumulative effect of the accounting change as
of the beginning of fiscal 1999.
WAREHOUSE CLOSING COSTS
The Company recorded a charge of $30,865 for warehouse and other facility
closing costs in fiscal 1999. In the first and second quarters of fiscal 2000,
the Company recorded additional charges of $1,000 and $1,500, respectively, in
net warehouse closing costs. At February 13, 2000 the reserve for warehouse
closing costs was $20,686, primarily representing future lease obligations.
Warehouse closing costs incurred relate principally to the Company's efforts to
relocate certain warehouses that were not otherwise impaired to larger and
better-located facilities.
INCOME TAXES
Deferred income taxes are provided to reflect temporary differences between
the financial and tax bases of assets and liabilities using presently enacted
tax rates and laws.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The following data show the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
12 WEEKS ENDED 24 WEEKS ENDED
--------------------------- ---------------------------
FEBRUARY 13, FEBRUARY 14, FEBRUARY 13, FEBRUARY 14,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income available to common stockholders
used in basic EPS............................ $181,608 $152,032 $310,926 $138,243
Interest on convertible bonds, net of tax...... 2,230 2,276 4,460 4,552
-------- -------- -------- --------
Net income available to common stockholders
after assumed conversions of dilutive
securities................................... $183,838 $154,308 $315,386 $142,795
======== ======== ======== ========
Weighted average number of common shares used
in basic EPS (000's)......................... 445,255 437,782 444,277 436,730
Stock options (000's).......................... 12,039 12,233 11,495 11,619
Conversion of convertible bonds (000's)........ 19,348 20,438 19,348 20,438
-------- -------- -------- --------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS
(000's)...................................... 476,642 470,453 475,120 468,787
======== ======== ======== ========
15
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
All per share data reflects the 2-for-1 stock split which was approved by
the Company's Board of Directors for shareholders of record on December 24,
1999. The common stock began trading at the post-split price on January 14,
2000.
DERIVATIVES
The Company uses derivative financial instruments only to manage
well-defined interest rate and foreign exchange risks. Forward foreign exchange
contracts are used to hedge the impact of fluctuations of foreign exchange on
inventory purchases. The amount of interest rate and foreign exchange contracts
outstanding at quarter-end or in place during the first 24 weeks of fiscal 2000
were not material to the Company's results of operations or its financial
position.
Effective December 10, 1999, the Company entered into a "fixed-to-floating"
interest rate swap agreement on its $300,000 7 1/8% senior notes, replacing the
fixed interest rate with a floating rate indexed to the 30-day commercial paper
rate.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which established accounting and reporting
standards for derivative instruments and for hedging activities. In June 1999,
the FASB issued SFAS No. 137, which deferred the effective date of SFAS No. 133
for the Company to the beginning of its fiscal 2001. Presently, the Company has
limited use of derivative financial instruments and believes that SFAS No. 133
would not have a material impact on its results of operations or financial
position.
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.
16
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2)--COMPREHENSIVE INCOME
Consolidated comprehensive income is as follows:
12 WEEKS ENDED 24 WEEKS ENDED
--------------------------- ---------------------------
FEBRUARY 13, FEBRUARY 14, FEBRUARY 13, FEBRUARY 14,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net income..................................... $181,608 $152,032 $310,926 $138,243
Other comprehensive income (expense):
Foreign currency translation................. 17,530 16,048 31,876 33,196
Income tax expense........................... (7,012) (6,419) (12,750) (13,278)
-------- -------- -------- --------
Other comprehensive income, net of income
taxes.................................... 10,518 9,629 19,126 19,918
-------- -------- -------- --------
Comprehensive income........................... $192,126 $161,661 $330,052 $158,161
======== ======== ======== ========
NOTE (3)--DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has in place a $425,000 commercial paper program supported by a
$425,000 bank credit facility with a group of 11 banks, which expires in
January, 2001. At February 13, 2000 no amounts were outstanding under the loan
facility or the commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $138,000 commercial
paper program supported by a $97,000 bank credit facility with three Canadian
banks, which expires in March 2001. At February 13, 2000 no amounts were
outstanding under the bank credit facility or the Canadian commercial paper
program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $522,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit) totaling approximately $287,000. The outstanding
commitments under these facilities at February 13, 2000 totaled approximately
$122,000, including approximately $45,000 in standby letters of credit.
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 in operations.
17
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (5)--SEGMENT REPORTING
The Company and its subsidiaries are principally engaged in the operation of
membership warehouses in the United States, Canada, Japan; through
majority-owned subsidiaries in the United Kingdom, Taiwan and Korea; and through
a 50%-owned joint venture in Mexico. The Company's reportable segments are based
on management responsibility.
OTHER
UNITED STATES CANADIAN INTERNATIONAL
OPERATIONS OPERATIONS OPERATIONS TOTAL
------------- ---------- ------------- -----------
TWENTY-FOUR WEEKS ENDED FEBRUARY 13, 2000
Total revenue............................. $11,917,461 $2,172,814 $590,224 $14,680,499
Operating income (loss)................... 417,215 96,738 (420) 513,533
Depreciation and amortization............. 89,088 17,156 8,180 114,424
Capital expenditures...................... 432,234 21,023 61,861 515,118
Total assets.............................. 6,431,002 1,078,600 598,744 8,108,346
TWENTY-FOUR WEEKS ENDED FEBRUARY 14, 1999
Total revenue............................. $10,282,046 $1,878,012 $430,378 $12,590,436
Operating income (loss)................... 359,672 73,358 (1,245) 431,785
Depreciation and amortization............. 77,140 14,498 6,855 98,493
Capital expenditures...................... 296,074 48,976 22,025 367,075
Total assets.............................. 5,590,996 920,537 465,757 6,977,290
YEAR ENDED AUGUST 29, 1999
Total revenue............................. $22,404,026 $4,104,662 $947,343 $27,456,031
Operating income (loss)................... 723,375 146,839 (10,087) 860,127
Depreciation and amortization............. 177,661 32,559 14,591 224,811
Capital expenditures...................... 655,924 79,583 52,428 787,935
Total assets.............................. 5,984,537 992,943 527,521 7,505,001
18