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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 FEBRUARY 14, 1999
/ / 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
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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 219,651,922 common shares, par value $.01, outstanding at
March 1, 1999.
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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.................................................................... 11
Condensed Consolidated Statements of Income.............................................................. 12
Condensed Consolidated Statements of Cash Flows.......................................................... 13
Notes to Condensed Consolidated Financial Statements..................................................... 14
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 (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants.................................................... 18
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Companies, Inc.'s (the "Company" or "Costco") unaudited condensed
consolidated balance sheet as of February 14, 1999, the condensed consolidated
balance sheet as of August 30, 1998, and the unaudited condensed consolidated
statements of income and cash flows for the 12- and 24-week periods ended
February 14, 1999 and February 15, 1998 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 1999 is a
52-week year with period 13 ending on August 29, 1999. 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
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 include
words such as "plans", "intends", "expects", "anticipates", "believes", or
similar expressions. 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.
COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 14, 1999 AND FEBRUARY 15, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the second quarter of fiscal 1999 increased 21% to $152,032,
or $0.66 per share (diluted), from $125,993, or $0.56 per share (diluted),
during the second quarter of fiscal 1998.
Net sales increased 14% to $6,484,445 during the second quarter of fiscal
1999 from $5,697,098 during the second quarter of fiscal 1998. This increase was
due to opening a net of 14 new warehouses (16 opened, 2 closed) since the end of
the second quarter of fiscal 1998 and an increase in comparable warehouse sales.
Comparable sales, that is sales in warehouses open for at least a year,
increased 10 percent during the second quarter of fiscal 1999, 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 10% to $107,913 or 1.66% of net
sales in the second quarter of fiscal 1999 from $97,908 or 1.72% of net sales in
the second quarter of fiscal 1998. Membership fees include new membership
sign-ups at the new warehouses opened since the end of the second quarter of
fiscal 1998. Membership fees reflect a change from a cash to a deferred method
of 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. On a proforma basis, assuming the newly adopted accounting
treatment for deferring membership fees had been in effect in fiscal 1998,
membership fees and other in the second quarter of fiscal 1998 would have been
$93,897, or 1.65% of net sales, and the year-over-year second quarter increase
in membership fees and other would have been 15%.
Gross margin (defined as net sales minus merchandise costs) increased 16% to
$695,792 or 10.73% of net sales in the second quarter of fiscal 1999 from
$598,106 or 10.50% of net sales in the second quarter of fiscal 1998. The 23
basis point increase in gross margin as a percentage of net sales reflects a
one-time
3
benefit related to sales of tobacco products, as well as increased sales
penetration of certain higher gross margin ancillary businesses and private
label products, the expanded use of the Company's depot facilities, improved
performance of the international operations, and strong mid-year physical
inventory shrink results. The gross margin figures reflect accounting for
merchandise costs on the last-in, first-out (LIFO) method. The second quarter of
fiscal 1999 includes a $3,500 LIFO provision compared to a $2,500 LIFO provision
in the second quarter of fiscal 1998.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.38% during the second quarter of fiscal 1999 from 8.40% during
the second quarter of fiscal 1998. 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, which was partially offset by higher
expenses associated with international expansion and continued expansion and
rollout of certain ancillary businesses.
Preopening expenses totaled $3,951 or 0.06% of net sales during the second
quarter of fiscal 1999 compared to $4,071 or 0.07% of net sales during the
second quarter of fiscal 1998. One warehouse was opened in the second quarter of
fiscal 1999, compared to one warehouse opened during last year's second quarter.
Preopening expenses also include costs related to remodels, including expanded
fresh foods and ancillary operations at existing warehouses, as well as new
international expansion.
A provision for warehouse closing costs of $3,000 was recorded in the second
quarter of fiscal 1999 as compared to no provision recorded in the second
quarter of fiscal 1998. The provision included closing costs for warehouses
being relocated to new facilities during fiscal 1999.
Interest expense totaled $10,995 in the second quarter of fiscal 1999
compared to $10,965 in the second quarter of fiscal 1998. Interest expense
primarily includes interest on the 3 1/2% Zero Coupon Notes and the 7 1/8%
Senior Notes.
Interest income and other totaled $11,192 in the second quarter of fiscal
1999 compared to $7,743 in the second quarter of fiscal 1998. The increase
primarily reflects interest earned on higher balances of cash and cash
equivalents and short-term investments during the second quarter of fiscal 1999,
as compared to the year-earlier second quarter period.
The effective income tax rate on earnings in the second quarter of both
fiscal 1999 and 1998 was 40.0%.
COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 14, 1999 AND FEBRUARY 15, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first half of fiscal 1999 reflect net income
of $138,243, or $0.61 per share (diluted), compared to net income of $223,919,
or $0.99 per share (diluted) during the first half of fiscal 1998. 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 deferred method. Before the impact of this
non-cash charge, net earnings were $256,266, or $1.11 per share. Assuming the
newly adopted accounting treatment for deferring membership fees had been in
effect in fiscal 1998, last year's first half membership fees and other income
would have been reduced by $20,610 to $185,805; net earnings in the first half
of fiscal 1998 would have been $211,553, or $0.94 per share; and the
year-over-year first half earnings increase would have been 21%.
Net sales increased 12% to $12,378,683 during the first half of fiscal 1999
from $11,018,354 during the first half of fiscal 1998. This increase was
primarily due to an increase in comparable warehouse sales and opening a net of
14 warehouses (16 opened, 2 closed) since the end of the second quarter of
fiscal 1998. Comparable sales, that is sales in warehouses open for at least a
year, increased 9 percent during the first half of fiscal 1999, reflecting new
marketing and merchandising efforts, including the rollout of fresh foods
4
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 $211,753 or 1.71% of net
sales in the first half of fiscal 1999 from $206,415 or 1.87% of net sales in
the first half of fiscal 1998. Membership fees include new membership sign-ups
at the new warehouses opened since the end of the second quarter of fiscal 1998.
On a proforma basis, assuming the newly adopted accounting treatment for
deferring membership fees had been in effect in fiscal 1998, membership fees and
other in the first half of fiscal 1998 would have been $185,805, or 1.69% of
sales, and the year-over-year first half increase in membership fees and other
would have been 14%.
Gross margin (defined as net sales minus merchandise costs) increased 14% to
$1,302,245 or 10.52% of net sales in the first half of fiscal 1999 from
$1,140,066 or 10.35% of net sales in the first half of fiscal 1998. The 17 basis
point 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, expanded use of the Company's depot facilities, improved
international operations, and strong mid-year physical inventory shrink results.
The gross margin figures reflect accounting for merchandise costs on the
last-in, first-out (LIFO) method. The first half of fiscal 1999 includes a
$6,000 LIFO provision compared to a $5,000 LIFO provision in the first half of
fiscal 1998.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.58% during the first half of fiscal 1999 from 8.62% during the
first half of fiscal 1998. 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, which was partially offset by higher
expenses associated with international expansion and continued expansion and
rollout of certain ancillary businesses.
Preopening expenses totaled $14,658 or 0.12% of net sales during the first
half of fiscal 1999 compared to $11,414 or 0.10% of net sales during the first
half of fiscal 1998. Nine warehouses were opened in the first half of fiscal
1999 (including two relocated warehouses), compared to nine new locations during
the last year's first half (including one relocated warehouse). The increase in
preopening expenses is primarily attributable to higher relative costs of
opening in the new Chicago and international markets. Preopening expenses also
include costs related to remodels, including expanded fresh foods and ancillary
operations at existing warehouses.
In the first half of fiscal 1999 the Company recorded a pre-tax provision
for warehouse closing costs of $5,000, or $.01 per share on an after-tax basis
(diluted), compared to a pre-tax provision for warehouse closing costs of $2,000
or $.01 per share on an after-tax basis (diluted) recorded in the first half of
fiscal 1998. The provisions included closing costs for warehouses closed in each
respective fiscal year, including closing costs associated with warehouses which
were or are being relocated to new facilities. There were two relocations in the
first half of fiscal 1999 compared to one relocation in the first half of fiscal
1998.
Interest expense totaled $21,907 in the first half of fiscal 1999 compared
to $21,888 in the first half of fiscal 1998. Interest expense primarily includes
interest on the 3 1/2% Zero Coupon Notes and the 7 1/8% Senior Notes.
Interest income and other totaled $17,231 in the first half of fiscal 1999
compared to $11,463 in the first half of fiscal 1998. The increase primarily
reflects interest earned on higher balances of 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 fiscal 1999
and 1998 was 40.0%.
5
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 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 $525,000 to $575,000 during
fiscal 1999 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $75,000 to $125,000 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 $628,509 at
February 14, 1999), short-term borrowings under revolving credit facilities and
other financing sources as required.
Expansion plans are to open a net of 18 to 21 new warehouse clubs in fiscal
1999, plus seven relocations of existing warehouses to larger and better-located
facilities. Through the end of the first half of fiscal 1999, the Company opened
a net of 7 new warehouses (9 total openings, including 2 relocations). Expansion
plans for the remainder of the fiscal year include 9 to 12 new openings in the
U.S. and Canada (plus five relocations), one warehouse in Taiwan, and one in
Japan. Fiscal 1999 plans also include the continuation of a remodeling and
retrofitting program, which will upgrade a number of older facilities to include
expanded fresh foods and ancillary departments--including expanded food courts,
pharmacy and optical departments and gas stations.
Costco and its Mexico-based joint venture partner, Controladora Comercial
Mexicana, each own a 50% interest in Price Club Mexico. As of February 14, 1999,
Price Club Mexico operated 16 membership warehouses in Mexico.
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 nine banks, of which $175,000
expires on January 24, 2000, and $250,000 expires on January 30, 2001. At
February 14, 1999, no amounts were outstanding under the loan facility or the
commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $134,000 commercial
paper program supported by a $94,000 bank credit facility with three Canadian
banks, of which $57,000 expires in March 2000, and $37,000 expires in March
2001. At February 14, 1999, 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 $519,000 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 $325,000. The outstanding
commitments under these facilities at February 14, 1999 totaled approximately
$148,000, including approximately $53,000 in standby letters of credit for
workers' compensation requirements.
6
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 the end of second quarter or
in place during the first 24 weeks of fiscal 1999 were not material to the
Company's results of operations or its financial position.
YEAR 2000
The Company uses a number of computer software programs and embedded
operating systems that were not originally designed to process dates beyond the
year 1999. Like most automated companies, Costco is addressing the Year 2000
challenge to make sure all of its systems are Year 2000 compliant and fully
operational prior to the year 2000 and beyond. As far back as the early 1990's,
the Company began taking initial measures to ensure that its systems would
function in the year 2000 and beyond. The Company has completed testing of all
key systems, and believes that the Year 2000 issues will not present any
significant operational problems. Total costs related to the year 2000 effort
are estimated to be less than $5,000, of which approximately 85% has been
incurred by the Company through February 14, 1999. While it is possible that
systems currently being reviewed and/or tested may produce an unexpected cost
increase, the Company does not believe it would add materially to the current
estimate.
Additionally, Costco has contacted and will continue to contact significant
vendors, suppliers, financial institutions and other third party providers upon
which its business depends. These efforts are designed to minimize the impact to
the Company should these third parties fail to remediate their Year 2000 issues.
However, the Company can give no assurances that such third parties will in fact
be successful in resolving all of their Year 2000 issues, and the failure of
such third parties to comply on a timely basis could have an adverse effect on
the Company. The Company anticipates minimal business disruption as a result of
Year 2000 issues; however, possible consequences include, but are not limited
to, delays in delivery or receipt of merchandise, inability to process
transactions, loss of communications, and similar interruptions of normal
business activities. To the extent practicable, the Company is evaluating
contingency plans to minimize the effect on the Company's operations in the
event of any third party system or product failure. The Company will continue to
make every effort to ensure that its business, financial condition and results
of operations will not be adversely impacted by a failure of its systems or the
systems of others.
FINANCIAL POSITION AND CASH FLOWS
Working capital totaled approximately $382,000 at February 14, 1999,
compared to $431,000 at August 30, 1998. The decrease in working capital is
primarily attributable to deferred membership income of approximately $230,000,
resulting from the Company's change in accounting for membership fees from a
cash to a deferred method in the first quarter of fiscal 1999.
Net cash provided by operating activities totaled $424,294 in the first half
of fiscal 1999 compared to $433,865 in the first half of fiscal 1998. The
decrease in net cash from operating activities is primarily a result of an
increase in owned inventory (inventory less trade payables), during the first
half of fiscal 1999 compared to the first half of fiscal 1998, offset by
increased operating income and a positive change in net receivables, other
current assets, and accrued and other current liabilities.
Net cash used in investing activities totaled $571,942 in the first half of
fiscal 1999 compared to $268,587 in the first half of fiscal 1998. The investing
activities primarily relate to additions to property and equipment for new and
remodeled warehouses of $367,075 and $281,079 in the first half of fiscal 1999
and 1998, respectively. Net cash used in investing activities also reflects an
increase in short-term investments of $228,361 since the beginning of the fiscal
year.
7
Net cash provided by financing activities totaled $106,543 in the first half
of fiscal 1999 compared to $1,705 in the first half of fiscal 1998. The increase
is primarily attributable to increases in bank checks outstanding and proceeds
from the exercise of stock options.
The Company's balance sheet as of February 14, 1999 reflects a $717,470 or
11% increase in total assets since August 30, 1998. The increase is primarily
due to increases in merchandise inventory, short-term investments 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 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 28, 1999 at
the Meydenbauer Center Hall in Bellevue, Washington. Stockholders of record at
the close of business on December 11, 1998 were entitled to notice of and to
vote in person or by proxy at the annual meeting. At the date of record, there
were 218,475,251 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.
(1) To elect four Class III directors to hold office until the 2002 Annual
Meeting of Stockholders and until their successors are elected and
qualified.
WITHHELD AUTHORITY
TOTAL SHARES AND
VOTED/(%) FOR VOTES/(%) AGAINST VOTES/(%) ABSTAINED VOTES/(%)
------------- ------------- --------------------- ---------------------
Richard D. DiCerchio..................... 190,345,047 184,310,803 -- 6,034,244
(Class III) 87.12% 96.83% -- 3.17%
Richard M. Libenson...................... 190,345,047 184,733,148 -- 5,611,899
(Class III) 87.12% 97.05% -- 2.95%
John W. Meisenbach....................... 190,345,047 184,328,084 -- 6,016,963
(Class III) 87.12% 96.84% -- 3.16%
Charles T. Munger........................ 190,345,047 184,776,364 -- 5,568,683
(Class III) 87.12% 97.07% -- 2.93%
8
(2) To amend The Costco Companies, Inc. 1993 Combined Stock Grant and Stock
Option Plan to increase the number of shares of common stock available
for issuance from 20 million shares to 30 million shares.
WITHHELD AUTHORITY
TOTAL SHARES AGAINST AND
VOTED/(%) FOR VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
- ------------- ------------- ---------------- ---------------------
190,345,247 138,441,232 51,314,441 589,574
87.12% 72.73% 26.96% .31%
(3) To approve a change in the state of incorporation of the Company from
Delaware to Washington, through a merger of Costco Companies, Inc. into
its wholly owned subsidiary Costco Wholesale Corporation.
WITHHELD AUTHORITY
TOTAL SHARES AGAINST AND
VOTED/(%) FOR VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
- ------------- ------------- ---------------- ---------------------
190,345,047 157,920,538 11,137,874 21,286,635
87.12% 82.97% 5.85% 11.18%
(4) To consider and ratify the selection of the Company's independent public
accountants, Arthur Andersen LLP.
WITHHELD AUTHORITY
TOTAL SHARES AND
VOTED/(%) FOR VOTES/(%) AGAINST VOTES/(%) ABSTAINED VOTES/(%)
- ------------- ------------- ----------------- ---------------------
190,345,047 189,800,764 94,649 449,634
87.12% 99.71% .05% .24%
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:
(27.1) Financial Data Schedule
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended February 14,
1999.
9
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:
- ------------------------------ -----------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date:
- ------------------------------ -----------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
10
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
FEBRUARY 14, AUGUST 30,
1999 1998
------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 324,599 $ 361,974
Short-term investments............................................. 303,910 75,549
Receivables, net................................................... 162,489 171,613
Merchandise inventories, net....................................... 2,055,546 1,910,751
Other current assets............................................... 218,414 108,343
------------- -------------
Total current assets............................................. 3,064,958 2,628,230
------------- -------------
PROPERTY AND EQUIPMENT
Land and land rights............................................... 1,198,694 1,119,663
Buildings and leasehold and land improvements...................... 2,302,224 2,170,896
Equipment and fixtures............................................. 1,056,696 948,515
Construction in progress........................................... 135,571 91,901
------------- -------------
4,693,185 4,330,975
Less-accumulated depreciation and amortization..................... (1,023,529) (935,603)
------------- -------------
Net property and equipment....................................... 3,669,656 3,395,372
------------- -------------
OTHER ASSETS......................................................... 242,676 236,218
------------- -------------
$ 6,977,290 $ 6,259,820
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................... $ 1,739,119 $ 1,605,533
Accrued salaries and benefits...................................... 397,297 352,903
Accrued sales and other taxes...................................... 112,446 102,367
Deferred membership income......................................... 230,043 --
Other current liabilities.......................................... 203,621 136,139
------------- -------------
Total current liabilities........................................ 2,682,526 2,196,942
LONG-TERM DEBT....................................................... 934,921 930,035
DEFERRED INCOME TAXES AND OTHER LIABILITIES.......................... 61,809 61,483
------------- -------------
Total liabilities................................................ 3,679,256 3,188,460
------------- -------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST.................................................... 110,946 105,474
------------- -------------
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;
219,538,000 and 217,589,000 shares issued and outstanding........ 2,195 2,176
Additional paid-in capital......................................... 867,372 817,628
Accumulated foreign currency translation........................... (118,646) (151,842)
Retained earnings.................................................. 2,436,167 2,297,924
------------- -------------
Total stockholders' equity....................................... 3,187,088 2,965,886
------------- -------------
$ 6,977,290 $ 6,259,820
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
11
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
12 WEEKS ENDED 24 WEEKS ENDED
----------------------------- -----------------------------
FEBRUARY 14, FEBRUARY 15, FEBRUARY 14, FEBRUARY 15,
1999 1998 1999 1998
------------- ------------- ------------- -------------
REVENUE
Net sales................................... $ 6,484,445 $ 5,697,098 $ 12,378,683 $ 11,018,354
Membership fees and other................... 107,913 97,908 211,753 206,415
------------- ------------- ------------- -------------
Total revenue........................... 6,592,358 5,795,006 12,590,436 11,224,769
OPERATING EXPENSES
Merchandise costs........................... 5,788,653 5,098,992 11,076,438 9,878,288
Selling, general and administrative......... 543,565 478,732 1,062,555 949,443
Preopening expenses......................... 3,951 4,071 14,658 11,414
Provision for impaired assets and warehouse
closing costs............................. 3,000 -- 5,000 2,000
------------- ------------- ------------- -------------
Operating income........................ 253,189 213,211 431,785 383,624
OTHER INCOME (EXPENSE)
Interest expense............................ (10,995) (10,965) (21,907) (21,888)
Interest income and other................... 11,192 7,743 17,231 11,463
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE............... 253,386 209,989 427,109 373,199
Provision for income taxes.................. 101,354 83,996 170,843 149,280
------------- ------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE......................... 152,032 125,993 256,266 223,919
Cumulative effect of accounting change, net
of tax.................................... -- -- 118,023 --
------------- ------------- ------------- -------------
NET INCOME.................................. $ 152,032 $ 125,993 $ 138,243 $ 223,919
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME PER COMMON SHARE:
Basic earnings per share:
Income before cumulative effect of
accounting change..................... $ .69 $ .59 $ 1.17 $ 1.05
Cumulative effect of accounting change,
net of tax............................ -- -- (.54) --
------------- ------------- ------------- -------------
Net income.............................. $ .69 $ .59 $ .63 $ 1.05
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Diluted earnings per share:
Income before cumulative effect of
accounting change..................... $ .66 $ .56 $ 1.11 $ .99
Cumulative effect of accounting change,
net of tax............................ -- -- (.50) --
------------- ------------- ------------- -------------
Net income.............................. $ .66 $ .56 $ .61 $ .99
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Shares used in calculation (000's):
Basic..................................... 218,891 214,590 218,365 214,211
Diluted................................... 235,227 230,482 234,394 229,962
Pro forma amounts assuming accounting change
had been in effect in fiscal 1998:
Net income................................ $ 152,032 $ 123,586 $ 256,266 $ 211,553
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings per common share--basic.......... $ .69 $ .58 $ 1.17 $ .99
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings per common share--diluted........ $ .66 $ .55 $ 1.11 $ .94
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements.
12
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS)
(UNAUDITED)
24 WEEKS ENDED
-----------------------------
FEBRUARY 14, FEBRUARY 15,
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................... $ 138,243 $ 223,919
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 98,493 86,720
Accretion of discount on zero coupon notes......................... 7,586 7,326
Cumulative effect of accounting change, net of tax................. 118,023 --
Change in receivables, accrued and other current liabilities....... 154,424 86,321
Increase in merchandise inventories................................ (130,368) (80,768)
Increase in accounts payable....................................... 49,150 113,865
Other.............................................................. (11,257) (3,518)
------------- -------------
Total adjustments................................................ 286,051 209,946
------------- -------------
Net cash provided by operating activities.......................... 424,294 433,865
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.................................. (367,075) (281,079)
Proceeds from the sale of property and equipment..................... 30,101 15,385
Increase in short-term investments................................... (228,361) --
Other................................................................ (6,607) (2,893)
------------- -------------
Net cash used in investing activities.............................. (571,942) (268,587)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on short-term borrowings................................ -- (24,979)
Increase (decrease) in bank checks outstanding....................... 70,793 (7,958)
Net proceeds from long-term borrowings............................... 2,807 2,338
Payments on long-term debt and notes payable......................... (5,517) (3,660)
Proceeds from minority interests, net................................ 5,277 10,222
Exercise of stock options............................................ 33,183 25,742
------------- -------------
Net cash provided by financing activities.......................... 106,543 1,705
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................. 3,730 (1,802)
------------- -------------
Net increase/(decrease) in cash and cash equivalents............... (37,375) 165,181
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................... 361,974 175,508
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 324,599 $ 340,689
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized).............................. $ 14,193 $ 16,367
Income taxes....................................................... 108,393 102,463
The accompanying notes are an integral part of these financial statements.
13
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, Costco Wholesale Corporation and subsidiaries, and The
Price Company 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 February 14, 1999, Costco operated 285 warehouse clubs: 217 in
the United States (in 26 states); 57 in Canada (in nine Canadian provinces);
seven in the United Kingdom; three in Korea, and one in Taiwan. As of February
14, 1999, the Company also operated (through a 50%-owned joint venture) 16
warehouses in Mexico.
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 30, 1998.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1999 is a 52-week fiscal year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending August 29, 1999, consisting of 16 weeks.
CASH AND CASH EQUIVALENTS
The Company considers all investments in highly liquid debt instruments
maturing within 90 days after purchase as cash equivalents unless amounts are
held in escrow for future property purchases or restricted by agreements.
SHORT-TERM INVESTMENTS
Short-term investments include highly liquid investments in United States
and Canadian government obligations, along with other investment vehicles, some
of which have maturities of three months or less at the time of purchase. The
Company's policy is to classify these investments as short-term investments
rather than cash equivalents if they are acquired and disposed of through its
investment trading account,
14
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
held for future property purchases, or restricted by agreement. The fair value
of the short-term investments approximates their carrying value and unrealized
holding gains and losses were not significant.
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 $22,150 at
February 14, 1999 and $21,150 at February 15, 1998.
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 $81,661 and $10,376 at February 14, 1999 and August 30, 1998, respectively,
representing the excess of outstanding checks over cash on deposit at the banks
on which the checks were drawn.
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", which historically was consistent with generally
accepted accounting principles and industry practice, 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 $.50 per share) to reflect the cumulative effect of the
accounting change as of the beginning of fiscal 1999.
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 Company adopted Financial Accounting Standards Board (FASB) Statement
No. 128, "Earnings per Share" (SFAS No. 128) in the second quarter of fiscal
1998. SFAS No. 128 established new standards for computing and presenting
earnings per share (EPS) for entities with publicly-held common stock.
15
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 14, FEBRUARY 15, FEBRUARY 14, FEBRUARY 15,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net income available to common stockholders
used in basic EPS............................ $ 152,032 $ 125,993 $ 138,243 $ 223,919
Interest on convertible bonds.................. 2,276 2,198 4,552 4,396
------------- ------------- ------------- -------------
Net income available to common stockholders
after assumed conversions of dilutive
securities................................... $ 154,308 $ 128,191 $ 142,795 $ 228,315
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average number of common shares used
in basic EPS (000's)......................... 218,891 214,590 218,365 214,211
Stock options (000's).......................... 6,117 5,673 5,810 5,532
Conversion of convertible bonds (000's)........ 10,219 10,219 10,219 10,219
------------- ------------- ------------- -------------
Weighted number of common shares and dilutive
potential common stock used in diluted EPS
(000's)...................................... 235,227 230,482 234,394 229,962
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
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)--COMPREHENSIVE INCOME
Effective with the first quarter of fiscal 1999 the Company implemented
Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive
Income", which requires companies to
16
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2)--COMPREHENSIVE INCOME (CONTINUED)
report by major components and in total, the change in equity (net assets)
during the period from non-owner sources. Consolidated comprehensive income is
as follows:
12 WEEKS ENDED 24 WEEKS ENDED
----------------------------- -----------------------------
FEBRUARY 14, FEBRUARY 15, FEBRUARY 14, FEBRUARY 15,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Net income................................................ $ 152,032 $ 125,993 $ 138,243 $ 223,919
Other comprehensive income (expense):
Foreign currency translation............................ 16,048 (17,575) 33,196 (27,713)
Income tax (expense), benefit........................... (6,419) 7,030 (13,278) 11,085
------------- ------------- ------------- -------------
Other comprehensive income (expense), net of income
taxes............................................... 9,629 (10,545) 19,918 (16,628)
------------- ------------- ------------- -------------
Comprehensive income...................................... $ 161,661 $ 115,448 $ 158,161 $ 207,291
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
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 nine banks, of which $175,000
expires on January 24, 2000, and $250,000 expires on January 30, 2001. At
February 15, 1999, no amount was outstanding under the loan facility or the
commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $134,000 commercial
paper program supported by a $94,000 bank credit facility with three Canadian
banks, of which $57,000 expires in March 2000, and $37,000 expires in March
2001. At February 14, 1999, no amount was 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 $519,000 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 $325,000. The outstanding
commitments under these facilities at February 14, 1999 totaled approximately
$148,000, including approximately $53,000 in standby letters of credit for
workers' compensation requirements.
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.
17