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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 NOVEMBER 23, 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 jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
999 LAKE DRIVE
ISSAQUAH, WASHINGTON 98027
(Address of principal executive office)
(425) 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 214,303,346 common shares, par value $.01, outstanding at
November 30, 1997.
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COSTCO COMPANIES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
PAGE
----
ITEM 1--FINANCIAL STATEMENTS.............................................. 3
Condensed Consolidated Balance Sheets................................... 9
Condensed Consolidated Statements of Income............................. 10
Condensed Consolidated Statements of Cash Flows......................... 11
Notes to Condensed Consolidated Financial Statements.................... 12
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS................................................. 7
ITEM 2--CHANGES IN SECURITIES............................................. 7
ITEM 3--DEFAULTS UPON SENIOR SECURITIES................................... 7
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 7
ITEM 5--OTHER INFORMATION................................................. 7
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.................................. 7
Exhibit (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants.................. 15
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Companies, Inc.'s (the "Company" or "Costco") unaudited condensed
consolidated balance sheet as of November 23, 1997, the condensed consolidated
balance sheet as of August 31, 1997, and the unaudited condensed consolidated
statements of income and cash flows for the 12-week periods ended November 23,
1997, and November 24, 1996 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 1998 is a
52-week year with period 13 ending on August 30, 1998. 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 1997 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED NOVEMBER 23, 1997 AND NOVEMBER 24, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first quarter of fiscal 1998 reflect net
income of $97,926, or $.44 per share (fully diluted), compared to net income of
$31,810, or $.16 per share (fully diluted), during the first quarter of fiscal
1997. The net income in the first quarter of fiscal 1997 includes 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 asset
impairment charge, net income for the first quarter of fiscal 1997 would have
been $70,485, or $.34 per share (fully diluted).
Net sales increased 11% to $5,321,256 during the first quarter of fiscal
1998 from $4,785,636 during the first quarter of fiscal 1997. This increase was
due to opening a net of 11 new warehouses (16 opened, 5 closed) since the end of
the first quarter of fiscal 1997 and an increase in comparable warehouse sales.
Comparable sales, that is sales in warehouses open for at least a year,
increased 8 percent during the first quarter of fiscal 1998 compared to an 8
percent increase in the first 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 contribute to sales increases.
Membership fees and other revenue increased 11% to $108,507 or 2.04% of net
sales in the first quarter of fiscal 1998 from $97,772 or 2.04% of net sales in
the first quarter of fiscal 1997. Membership fees include new membership
sign-ups at the new warehouses opened since the end of the first quarter of
fiscal 1997.
Gross margin (defined as net sales minus merchandise costs) increased 14% to
$541,960 or 10.18% of net sales in the first quarter of fiscal 1998 from
$477,267, or 9.97% of net sales in the first quarter of fiscal 1997. The 21
basis point increase in gross margin as a percentage of net sales reflects the
Company's greater purchasing power, expanded use of its depot facilities,
improved fresh foods and softlines margins, and increased sales penetration of
certain higher gross margin ancillary businesses. The gross margin figures
reflect accounting for merchandise costs on the last-in, first-out (LIFO)
method. The first quarter of fiscal 1998 and 1997 each included a $2,500 LIFO
provision.
3
Selling, general and administrative expenses as a percent of net sales
decreased to 8.85% during the first quarter of fiscal 1998 from 8.90% during the
first quarter of fiscal 1997. 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.
Preopening expenses totaled $7,343 or 0.14% of net sales during the first
quarter of fiscal 1998 compared to $10,197 or 0.21% of net sales during the
first quarter of fiscal 1997. Eight warehouses were opened in the first quarter
of fiscal 1998 (including one relocated warehouse), compared to nine warehouses
(included three relocated warehouses) opened during last year's first quarter.
Preopening expenses also include costs related to remodels, including expanded
fresh foods and ancillary operations at existing warehouses.
In the first quarter of fiscal 1998 the Company recorded a pre-tax provision
for warehouse closing costs of $2,000, or $.01 per share on an after-tax basis
(fully diluted), compared to a pre-tax provision for warehouse closing costs of
$5,000 or $.01 per share on an after-tax basis (fully diluted) recorded in the
first quarter of fiscal 1997. The provisions included estimated closing costs
for warehouses closed in the first quarter of each respective fiscal year,
including closing costs associated with warehouses which were relocated to new
facilities.
Interest expense totaled $10,923 in the first quarter of fiscal 1998
compared to $18,933 in the first quarter of fiscal 1997. The decrease in
interest expense is primarily related to the call for redemption of both the
Company's 6 3/4% ($285,079 principal amount) and 5 1/2% ($179,338 principal
amount) Convertible Subordinated Debentures during the second quarter of fiscal
1997, and the call for redemption of the Company's 5 3/4% ($300,000 principal
amount) Convertible Subordinated Debentures during the fourth quarter of fiscal
1997. In the aggregate, approximately $302,000 of these three convertible
debentures were converted into common stock (13.1 million shares) and
approximately $462,000 were redeemed for cash. This reduction in debt was offset
by the raising of approximately $450,000 through the issuance of 3 1/2%
($900,000 principal amount at maturity) Zero Coupon Convertible Subordinated
Notes during the fourth quarter of fiscal 1997. (See "Note 2--Debt".)
Interest income and other totaled $3,720 in the first quarter of fiscal 1998
compared to $3,657 in the first quarter of fiscal 1997.
The effective income tax rate on earnings in the first quarter of fiscal
1998 was 40.00% compared to a 40.50% effective tax rate in the first quarter of
fiscal 1997. The decrease in the effective tax 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.
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.
4
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 $450,000 during
fiscal 1998 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 $205,693 at November 23, 1997), short-term
borrowings under revolving credit facilities, and/or commercial paper facilities
and other financing sources as required. A total of approximately $187,000 has
been spent on capital expenditures during the first 12 weeks of fiscal 1998,
which includes the acquisition costs of seven sites in Michigan from the
Hechinger Company, a home improvement warehouse operation. The Company concluded
a purchase agreement with Hechinger Company in the first quarter of fiscal 1998,
and intends to invest approximately $70,000 in these facilities, including
initial warehouse purchase and remodeling costs and working capital
requirements.
Expansion plans for the United States and Canada during fiscal 1998 are to
open approximately 18-20 new warehouse clubs, including five locations acquired
from the Hechinger Company (noted above), as well as one or two relocations of
existing warehouses to larger and better-located warehouses. Through the end of
the first 12 weeks of fiscal 1998, the Company has opened 5 warehouses in the
United States (including the relocation of its Pomona, California warehouse to
Chino Hills, California), 2 warehouses in Canada, and one warehouse in the
United Kingdom. The Company plans to consolidate several of its Southern
California distribution (depot) facilities into a larger, state-of-the-art
facility in Mira Loma, California in the second quarter of fiscal 1998. The
Company also expects to continue expansion of its international operations and
plans to open one or two additional units in the United Kingdom through its
60%-owned subsidiary during fiscal 1998. Other international markets are being
assessed, including the Pacific Rim.
Costco 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.
As of November 23, 1997, Price Club Mexico operated 14 Price Club warehouses in
Mexico.
BANK CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN
US DOLLARS)
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 12 banks, of which $250,000
expires on January 26, 1998, and $250,000 expires on January 30, 2001. At
November 23, 1997, no amount was outstanding under the loan facility or the
commercial paper program. The Company expects to renew for an additional
one-year term the $250,000 portion of the loan facility expiring on January 26,
1998, at substantially the same terms.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, of which $61,000 expires in March 1998 and $40,000 expires in March 1999.
At November 23, 1997, no amount was outstanding under the bank credit facility
and $11,900 was outstanding under the Canadian commercial paper program. The
Company expects to renew for an additional one-year term the $61,000 portion of
the loan facility expiring in March 1998, 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 $601,000 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 $258,000. The outstanding
commitments under these facilities at November 23,
5
1997 totaled approximately $106,000, including approximately $42,000 in standby
letters of credit for workers' compensation requirements.
DERIVATIVES
The Company has limited involvement with derivative financial instruments
and uses them 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 quarter of fiscal 1998 was immaterial to the Company's results
of operations or its financial position.
YEAR 2000 ISSUE
Like most corporations, the Company is reliant upon technology to run its
business. Many computer systems process dates using two digits to identify the
year, and some of these systems are unable to properly process dates beginning
with the year 2000. The Company has developed plans to address this Year 2000
issue and is preparing, modifying or updating its computer systems so that they
will be Year 2000 compliant. The Company believes that the costs connected with
such preparations will not be material to the Company's financial results.
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). Working capital totaled approximately
$133,000 at November 23, 1997 compared to $146,000 at August 31, 1997.
Net cash provided by operating activities totaled $209,748 in the first 12
weeks of fiscal 1998 compared to $80,812 in the first 12 weeks of fiscal 1997.
The increase in net cash from operating activities is primarily a result of
increased net income and decreased owned inventory (inventory less trade
payables) during the first 12 weeks of fiscal 1998 compared to the first 12
weeks of fiscal 1997.
Net cash used in investing activities totaled $182,258 in the first 12 weeks
of fiscal 1998 compared to $174,561 in the first 12 weeks of fiscal 1997. The
investing activities primarily relate to additions to property and equipment for
new and remodeled warehouses of $187,039 and $164,764 in the first 12 weeks of
fiscal 1998 and 1997, respectively. The Company opened eight warehouses
(including one relocation) in the first 12 weeks of fiscal 1997 compared to nine
warehouses (including three relocations) opened in the first 12 weeks of fiscal
1997. The first quarter of fiscal 1998 also includes a payment to the Hechinger
Company for the acquisition of seven locations in Michigan (five of which are in
the Detroit market).
Net cash provided by financing activities totaled $2,366 in the first 12
weeks of fiscal 1998 compared to $100,487 in the first 12 weeks of fiscal 1997.
This decrease reflects the utilization of cash flows from first quarter 1998
operating activities, as well as the use of cash balances generated from the
fourth quarter 1997 issuance of 3 1/2% Zero Coupon Subordinated Notes, to
finance expansion plans. This compares to the first quarter of fiscal 1997 when
the Company utilized its bank lines and commercial paper programs to finance
expansion plans.
The Company's balance sheet as of November 23, 1997 reflects a $608,852 or
11.1% increase in total assets since August 31, 1997. The increase is primarily
due to higher inventory levels associated with seasonal inventory needs leading
into the Christmas holiday season, and a net increase in property and equipment
primarily related to the Company's expansion program.
6
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 Price 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.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting is scheduled for 10:00 a.m. on January 21,
1998, at the Meydenbauer Center Hall in Bellevue, Washington. Matters to be
voted on will be included in the Company's proxy statement to be filed with the
Securities and Exchange Commission and distributed to stockholders prior to the
meeting.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(27) Financial Data Schedule
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended November 23,
1997.
7
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
Date: December 19, 1997 By /s/ JAMES D. SINEGAL
------------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: December 19, 1997 By /s/ RICHARD A. GALANTI
------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
8
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
NOVEMBER 23, 1997 AUGUST 31, 1997
----------------- ---------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................. $ 205,693 $ 175,508
Receivables, net........................... 203,792 147,133
Merchandise inventories, net............... 2,099,981 1,686,525
Other current assets....................... 77,944 100,784
----------------- ---------------
Total current assets..................... 2,587,410 2,109,950
----------------- ---------------
PROPERTY AND EQUIPMENT
Land and land rights....................... 1,177,149 1,094,607
Buildings and leasehold and land
improvements............................. 1,994,053 1,933,740
Equipment and fixtures..................... 873,017 840,578
Construction in progress................... 78,972 81,417
----------------- ---------------
4,123,191 3,950,342
Less-accumulated depreciation and
amortization............................. (832,514) (795,708)
----------------- ---------------
Net property and equipment............... 3,290,677 3,154,634
----------------- ---------------
OTHER ASSETS............................... 207,079 211,730
----------------- ---------------
$6,085,166 $5,476,314
----------------- ---------------
----------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding.................... $ 10,741 $ 14,930
Short-term borrowings...................... 11,900 25,460
Accounts payable........................... 1,826,025 1,379,379
Accrued salaries and benefits.............. 326,789 302,681
Accrued sales and other taxes.............. 100,217 90,774
Other current liabilities.................. 178,779 150,823
----------------- ---------------
Total current liabilities................ 2,454,451 1,964,047
LONG-TERM DEBT............................. 920,368 917,001
DEFERRED INCOME TAXES AND OTHER
LIABILITIES.............................. 41,691 38,967
----------------- ---------------
Total liabilities........................ 3,416,510 2,920,015
----------------- ---------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST.......................... 99,037 88,183
----------------- ---------------
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; 214,275,000 and
213,593,000 shares issued and
outstanding.............................. 2,143 2,136
Additional paid-in capital................. 720,032 706,324
Accumulated foreign currency translation... (88,564) (78,426)
Retained earnings.......................... 1,936,008 1,838,082
----------------- ---------------
Total stockholders' equity............... 2,569,619 2,468,116
----------------- ---------------
$6,085,166 $5,476,314
----------------- ---------------
----------------- ---------------
The accompanying notes are an integral part of these financial statements.
9
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
12 WEEKS ENDED
-------------------------------------
NOVEMBER 23, 1997 NOVEMBER 24, 1996
----------------- -----------------
REVENUE
Net sales................................. $5,321,256 $4,785,636
Membership fees and other................. 108,507 97,772
----------------- -----------------
Total revenue........................... 5,429,763 4,883,408
OPERATING EXPENSES
Merchandise costs......................... 4,779,296 4,308,369
Selling, general and administrative....... 470,711 426,104
Preopening expenses....................... 7,343 10,197
Provision for impaired assets and
warehouse closing costs................. 2,000 70,000
----------------- -----------------
Operating income........................ 170,413 68,738
OTHER INCOME (EXPENSE)
Interest expense.......................... (10,923) (18,933)
Interest income and other................. 3,720 3,657
----------------- -----------------
INCOME BEFORE PROVISION FOR INCOME
TAXES................................... 163,210 53,462
Provision for income taxes................ 65,284 21,652
----------------- -----------------
NET INCOME................................ $ 97,926 $ 31,810(a)
----------------- -----------------
----------------- -----------------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE--FULLY DILUTED:
Net income................................ $ 0.44 $ 0.16(a)
----------------- -----------------
----------------- -----------------
Shares used in calculation (000's)........ 230,068 199,630
----------------- -----------------
----------------- -----------------
- ------------------------
(a) Net income and net income per common and common equivalent share would have
been $70,485 and $0.34, respectively, without the effect of adopting FAS No.
121, using 227,096 fully-diluted shares.
The accompanying notes are an integral part of these financial statements.
10
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
12 WEEKS ENDED
-------------------------------------
NOVEMBER 23, 1997 NOVEMBER 24, 1996
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 97,926 $ 31,810
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 46,178 37,442
Provision for asset impairments......... -- 65,000
Increase in merchandise inventories..... (417,990) (483,954)
Increase in accounts payable............ 448,663 424,154
Other................................... 34,971 6,360
----------------- -----------------
Total adjustments..................... 111,822 49,002
----------------- -----------------
Net cash provided by operating
activities............................ 209,748 80,812
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment....... (187,039) (164,764)
Proceeds from the sale of property and
equipment............................... 6,861 1,072
Other..................................... (2,080) (10,869)
----------------- -----------------
Net cash used in investing activities... (182,258) (174,561)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from (payments on) short-term
borrowings.............................. (13,274) 102,650
Decrease in bank checks outstanding....... (5,296) (22,467)
Net proceeds from long-term borrowings.... 2,338 2,587
Payments on long-term debt and notes
payable................................. (1,809) (1,075)
Proceeds from minority interests, net..... 10,192 16,086
Exercise of stock options................. 10,215 2,706
----------------- -----------------
Net cash provided by financing
activities............................ 2,366 100,487
----------------- -----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH... 329 2,318
----------------- -----------------
Net increase in cash and cash
equivalents........................... 30,185 9,056
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR.................................... 175,508 101,955
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.................................. $ 205,693 $ 111,011
----------------- -----------------
----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)
(a)................................... $ 2,741 $ 28,870
Income taxes............................ 28,018 8,319
- ------------------------
(a) Interest on the 3 1/2% ($900 million principal amount at maturity) Zero
Coupon Subordinated Notes is not paid; rather the principal accretes to full
value at maturity. 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. These debentures were redeemed during fiscal 1997.
The accompanying notes are an integral part of these financial statements.
11
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"
or the "Company"). Costco is a holding company which operates primarily through
its major subsidiaries, The Price Company and subsidiaries, and Costco Wholesale
Corporation and subsidiaries. All intercompany transactions between the Company
and its subsidiaries have been eliminated in consolidation. Costco primarily
operates 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 November 23, 1997, Costco operated 268 warehouse clubs: 204 in
the United States (in 23 states); 56 in Canada (in nine Canadian provinces);
seven in the United Kingdom; and one in Taiwan--primarily under the "Costco
Wholesale" name. As of November 23, 1997, the Company also operated (through a
50%-owned joint venture) 14 warehouses in Mexico, and had a license agreement
for the operation of two membership warehouses in Korea.
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.
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 31, 1997.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1998 is a 52-week fiscal year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending August 30, 1998, consisting of 16 weeks.
MERCHANDISE INVENTORIES
Merchandise inventories are recorded at the lower of cost or market as
determined by the retail inventory method, and are stated using the last-in,
first-out (LIFO) method for U.S. merchandise inventories, and the first-in,
first-out (FIFO) method for foreign merchandise inventories. If the FIFO method
had been used, merchandise inventory would have been $18,650 higher at both
November 23, 1997 and November 24, 1996.
The Company provides for estimated inventory losses between physical
inventory counts on the basis of a standard percentage of sales. This provision
is adjusted to reflect the actual shrinkage results of physical inventory counts
which generally occur in the second and fourth fiscal quarters.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding. The
calculation for the 12-week period ended November 23, 1997, eliminates interest
expense, net of income taxes, on the 3 1/2% Zero Coupon Convertible Subordinated
Debentures and includes the additional shares issuable upon conversion of these
debentures. There was no dilutive effect from any of the three issues of
convertible subordinated debentures outstanding for the 12-week period ended
November 24, 1996.
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
in its second quarter ending February 15, 1998, following the December 15, 1997
effective date. If the provisions of SFAS No. 128 had been used to calculate EPS
for the 12-week periods ended November 23, 1997 and November 24, 1996, proforma
EPS would have been:
12 WEEKS ENDED
-------------------------------------
NOVEMBER 23, 1997 NOVEMBER 24, 1996
----------------- -----------------
Basic..................................... $0.46 $0.16
----- -----
----- -----
Diluted................................... $0.44 $0.16
----- -----
----- -----
Excluding the non-cash, pre-tax charge of $65,000 ($38,675 after-tax) for
asset impairment, basic and diluted earnings per share for the 12 weeks ended
November 24, 1996 would have been $.36 and $.34, respectively.
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.
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.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2)--DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 12 banks, of which $250,000
expires on January 26, 1998, and $250,000 expires on January 30, 2001. At
November 23, 1997, no amount was outstanding under the loan facility or the
commercial paper program. The Company expects to renew for an additional
one-year term the $250,000 portion of the loan facility expiring on January 26,
1998 at substantially the same terms.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, of which $61,000 expires in March 1998 and $40,000 expires in March 1999.
At November 23, 1997, no amount was outstanding under the bank credit facility
and $11,900 was outstanding under the Canadian commercial paper program. The
Company expects to renew for an additional one-year term the $61,000 portion of
the loan facility expiring in March 1998, 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 $601,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $258,000. The outstanding
commitments under these facilities at November 23, 1997 totaled approximately
$106,000, including approximately $42,000 in standby letters of credit for
workers' compensation requirements.
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:
12 WEEKS ENDED 12 WEEKS ENDED
NOVEMBER 23, NOVEMBER 24,
1997 1996
--------------- ---------------
Federal statutory income tax rate........... $57,124 35.00% $18,712 35.00%
State, foreign and other income taxes,
net....................................... 8,160 5.00% 2,940 5.50%
------- ----- ------- -----
$65,284 40.00% $21,652 40.50%
------- ----- ------- -----
------- ----- ------- -----
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 7 for
outstanding legal matters.
14