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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE QUARTERLY PERIOD ENDED MAY 9, 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 220,821,606 common shares, par value $.01, outstanding at
May 28, 1999.
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COSTCO COMPANIES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
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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
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2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Companies, Inc.'s (the "Company" or "Costco") unaudited condensed
consolidated balance sheet as of May 9, 1999, and the condensed consolidated
balance sheet as of August 30, 1998, unaudited condensed consolidated statements
of income for the 12- and 36-week periods ended May 9, 1999 and May 10, 1998,
and the unaudited condensed consolidated statements of cash flows for the
36-week periods then ended are included elsewhere herein. Also, included
elsewhere herein are notes to the unaudited condensed consolidated financial
statements and the results of the limited review performed by Arthur Andersen
LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 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 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, Year 2000 issues, 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 1998 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED MAY 9, 1999 AND MAY 10, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the third quarter of fiscal 1999 increased 24% to $105,877,
or $0.46 per share (diluted), from $85,227, or $0.38 per share (diluted), during
the third quarter of fiscal 1998.
Net sales increased 13% to $5,941,049 during the third quarter of fiscal
1999 from $5,241,926 during the third quarter of fiscal 1998. This increase was
due to opening a net of 11 new warehouses (13 opened, 2 closed) since the end of
the third 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 nine percent during the third quarter of fiscal 1999, 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 17% to $112,771 or 1.90% of net
sales in the third quarter of fiscal 1999 from $96,160 or 1.83% of net sales in
the third quarter of fiscal 1998. Membership fees include new membership
sign-ups at the new warehouses opened since the end of the third quarter of
fiscal 1998. Membership fees reflect the 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 pro forma basis, assuming the newly adopted accounting
treatment for deferring membership fees had been in effect in fiscal 1998,
3
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membership fees and other in the third quarter of fiscal 1998 would have been
$95,331, or 1.82% of net sales, and the year-over-year third quarter increase in
membership fees and other would have been 18%.
Gross margin (defined as net sales minus merchandise costs) increased 14% to
$599,333 or 10.09% of net sales in the third quarter of fiscal 1999 from
$526,171 or 10.04% of net sales in the third quarter of fiscal 1998. The five
basis point increase in gross margin as a percentage of net sales reflects the
Company's increased sales penetration of certain higher gross margin ancillary
business and private label products and improved performance of the
international operations. The gross margin figures reflect accounting for
merchandise costs on the last-in, first-out (LIFO) method. The third quarter of
fiscal 1999 includes a $3,500 LIFO provision compared to a $2,500 LIFO provision
in the third quarter of fiscal 1998.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.89% during the third quarter of fiscal 1999 from 8.91% during the
third 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 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 $6,120 or 0.10% of net sales during the third
quarter of fiscal 1999 compared to $8,884 or 0.17% of net sales during the third
quarter of fiscal 1998. Three warehouses were opened in the third quarter of
fiscal 1999 compared to six new locations opened during last year's third
quarter. 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 third
quarter of fiscal 1999 compared to $1,500 in the third quarter of fiscal 1998.
The provisions include estimated closing costs for warehouses being relocated to
new facilities during each fiscal year.
Interest expense totaled $10,524 in the third quarter of fiscal 1999
compared to $10,477 in the third quarter of fiscal 1998. The 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 $10,659 in the third quarter of fiscal
1999 compared to $7,562 in the third quarter of fiscal 1998. The increase
primarily reflects interest earned on higher balances of cash and cash
equivalents and short-term investments during the third quarter of fiscal 1999,
as compared to the third quarter of fiscal 1998.
The effective income tax rate on earnings in the third quarter of both
fiscal 1999 and 1998 was 40.0%.
COMPARISON OF THE 36 WEEKS ENDED MAY 9, 1999 AND MAY 10, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the first thirty-six weeks of fiscal 1999 was $244,120, or
$1.07 per share, compared to net income of $309,146, or $1.37 per share, during
the first thirty-six weeks of fiscal 1998. 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, impacted net income in the
first thirty-six weeks of fiscal 1999. Before the impact of this non-cash
charge, net earnings were $362,143, or $1.57 per share. Assuming the newly
adopted accounting treatment for deferring membership fees had been in effect in
fiscal 1998, membership fees and other income for the first thirty-six weeks of
the prior fiscal year would have been reduced by $21,439 to $281,136; net
earnings in the first thirty-six weeks of fiscal 1998 would have been $296,283,
or $1.31 per share; and the year-over-year earnings increase for the first
thirty-six weeks of fiscal 1999 would have been 22%.
4
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Net sales increased 13% to $18,319,732 during the first 36 weeks of fiscal
1999 from $16,260,280 during the first 36 weeks of fiscal 1998. This increase
was primarily due to an increase in comparable warehouse sales and opening a net
of 11 warehouses (13 opened, 2 closed) since the end of the third quarter of
fiscal 1998. Comparable sales, that is sales in warehouses open for at least a
year, increased nine percent during the first 36 weeks 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 to $324,524 or 1.77% of
net sales in the first 36 weeks of fiscal 1999 from $302,575 or 1.86% of net
sales in the first 36 weeks of fiscal 1998. Membership fees include new
membership sign-ups at the new warehouses opened since the end of the third
quarter of fiscal 1998. On a pro forma 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 36 weeks of fiscal 1998 would have
been $281,136 or 1.73% of sales, and the year-over-year increase in membership
fees and other for the first 36 weeks of fiscal 1999 would have been 15%.
Gross margin (defined as net sales minus merchandise costs) increased 14% to
$1,901,578 or 10.38% of net sales in the first 36 weeks of fiscal 1999 from
$1,666,237 or 10.25% of net sales in the first 36 weeks of fiscal 1998. The 13
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, 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 36 weeks of fiscal 1999 includes a $9,500 LIFO provision compared to a
$7,500 LIFO provision in the first 36 weeks of fiscal 1998.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.68% during the first 36 weeks of fiscal 1999 from 8.71% during
the first 36 weeks 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 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 $20,778 or 0.11% of net sales during the first
36 weeks of fiscal 1999 compared to $20,298 or 0.12% of net sales during the
first 36 weeks of fiscal 1998. Twelve warehouses were opened in the first 36
weeks of fiscal 1999 (including two relocated warehouses), compared to fifteen
new locations during the last year's first 36 weeks (including one relocated
warehouse). The increase in preopening expenses, even though the number of
warehouse openings declined, is primarily attributable to higher relative costs
of opening in the new Chicago and international markets. Preopening expenses
also includes costs related to remodels, including expanded fresh foods and
ancillary operations at existing warehouses.
In the first 36 weeks of fiscal 1999 the Company recorded a pre-tax
provision for warehouse closing costs of $6,500, or $0.02 per share on an
after-tax basis (diluted), compared to a pre-tax provision for warehouse closing
costs of $3,500, or $.01 per share on an after-tax basis (diluted) recorded in
the first 36 weeks of fiscal 1998. The provisions included estimated 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 warehouses relocated in the first 36 weeks of fiscal
1999 compared to one relocation and the consolidation of certain depot
facilities in the first 36 weeks of fiscal 1998.
Interest expense totaled $32,431 in the first 36 weeks of fiscal 1999
compared to $32,365 in the first 36 weeks of fiscal 1998. Interest expense
primarily includes interest on the 3 1/2% Zero Coupon Notes and the 7 1/8%
Senior Notes.
5
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Interest income and other totaled $27,890 in the first 36 weeks of fiscal
1999 compared to $19,025 in the first 36 weeks of fiscal 1998. This increase
primarily reflects interest earned on higher balances of cash and cash
equivalents and short-term investments during the first 36 weeks of fiscal 1999,
as compared to the year-earlier period.
The effective income tax rate on earnings in the first 36 weeks of both
fiscal 1999 and 1998 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 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 $661,132 at
May 9, 1999), short-term borrowings under revolving credit facilities and other
financing sources as required.
Expansion plans are to open a total of 23 new warehouse clubs in fiscal
1999, including six relocations of existing warehouses to larger and
better-located facilities. Through the end of the first 36 weeks of fiscal 1999,
the Company had opened a net of ten new warehouses (12 total openings, including
2 relocations). Expansion plans for the remainder of the fiscal year include
nine to ten new openings in the U.S. and Canada (including four relocations) and
one warehouse in Taiwan. 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 May 9, 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 May 9,
1999, no amounts were outstanding under the loan facility or the commercial
paper program.
In addition, a wholly owned Canadian subsidiary has a $137,000 commercial
paper program supported by a $96,000 bank credit facility with three Canadian
banks, of which $58,000 expires in March 2000 and $38,000 expires in March 2001.
At May 9, 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 $521,000 combined amounts of
the respective supporting bank credit facilities.
6
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LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $303,000. The outstanding
commitments under these facilities at May 9, 1999 totaled approximately
$125,000, including approximately $16,000 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 36 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 on into the 21(st) Century. As far back
as the early 1990's, the Company began taking initial measures to ensure that
its computer systems would function in the year 2000 and beyond, and in 1997
began a formal review of each of its applications to determine the Year 2000
compliance of its date-sensitive systems and equipment. This included
assessments of both information technology, such as point-of-sale computer
systems and financial software applications, as well as non-information
technology equipment, including critical facilities systems, such as security
systems, energy management, warehouse refrigeration, etc.
As of May 9, 1999, the Company has substantially completed the necessary
remediation and 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 $7,500, of which
the Company has incurred approximately 80% through May 9, 1999. While it is
possible that the remaining systems currently being implemented, reviewed,
and/or tested may produce an unexpected cost increase, the Company does not
believe it would add materially to the current estimated cost.
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.
Although the Company has not received responses from all of its suppliers, the
responses received have indicated that they are or will be Year 2000 compliant
and that they are anticipating no significant problems related to Year 2000
preparedness. 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, loss of local or regional electric power,
delays in delivery or receipt of merchandise, inability to process transactions,
loss of communications, and similar interruptions of normal business activities.
Although the Company has not finalized its contingency plans for possible Year
2000 issues, initial analysis and planning are underway. Where needed, the
Company will establish contingency plans based on assessment of its supplier
base and evaluation of outside risks. The Company anticipates the majority of
its contingency plans to be in place by October 31, 1999.
7
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FINANCIAL POSITION AND CASH FLOWS
Working capital totaled approximately $419,369 at May 9, 1999, compared to
$431,288 at August 30, 1998. Working capital was positively affected by a
$223,609 increase in cash and cash equivalents and short-term investments, which
increase was largely offset by an increase in deferred membership income of
$228,927, resulting from the Company's change in accounting for membership fees
from a cash to a deferred method.
Net cash provided by operating activities totaled $643,503 in the first 36
weeks of fiscal 1999 compared to $510,403 in the first 36 weeks of fiscal 1998.
The increase in net cash from operating activities is primarily a result of
increased net income, adjusted for the non-cash cumulative effect of accounting
charge, and a positive change in net receivables, accrued and other current
liabilities during the first 36 weeks of fiscal 1999 compared to the first 36
weeks of fiscal 1998.
Net cash used in investing activities totaled $680,982 in the first 36 weeks
of fiscal 1999 compared to $320,194 in the first 36 weeks of fiscal 1998. The
investing activities primarily relate to additions to property and equipment for
new and remodeled warehouses of $529,081 and $366,609 in the first 36 weeks of
fiscal 1999 and 1998, respectively. The Company opened 12 warehouses (including
2 relocations) in the first 36 weeks of fiscal 1999 and has plans to open 10 to
11 new warehouses (including four relocations) during the remainder of the
fiscal year compared to 16 new warehouses (including one relocation) opened
during fiscal 1998. Net cash used in investing activities also reflects an
increase in short-term investments of $176,154 since the beginning of fiscal
year 1999.
Net cash provided by financing activities totaled $78,344 in the first 36
weeks of fiscal 1999 compared to $27,824 in the first 36 weeks of fiscal 1998.
The increase is primarily attributable to an increase in bank checks outstanding
and a decrease in payments on short-term borrowings.
The Company's balance sheet as of May 9, 1999 reflects an $857,950 or 14%
increase in total assets since August 30, 1998. The increase is primarily due to
increases in merchandise inventory and property and equipment primarily related
to the Company's expansion program, as well as an increase in cash and cash
equivalents and short-term investments.
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
None.
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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 May 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 Companies, Inc.
REGISTRANT
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Date: June 21, 1999 /s/ JAMES D. SINEGAL
---------------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: June 21, 1999 /s/ RICHARD A. GALANTI
---------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
</TABLE>
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COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
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MAY 9, AUGUST 30,
1999 1998
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(UNAUDITED)
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ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................ $ 408,750 $ 361,974
Short-term investments................................................... 252,382 75,549
Receivables, net......................................................... 117,552 171,613
Merchandise inventories, net............................................. 2,104,256 1,910,751
Other current assets..................................................... 198,699 108,343
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Total current assets................................................... 3,081,639 2,628,230
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PROPERTY AND EQUIPMENT
Land and land rights..................................................... 1,251,953 1,119,663
Buildings and leasehold and land improvements............................ 2,368,874 2,170,896
Equipment and fixtures................................................... 1,087,558 948,515
Construction in progress................................................. 130,372 91,901
----------- ----------
4,838,757 4,330,975
Less-accumulated depreciation and amortization........................... (1,067,652) (935,603)
----------- ----------
Net property and equipment............................................. 3,771,105 3,395,372
----------- ----------
OTHER ASSETS............................................................... 265,026 236,218
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$ 7,117,770 $6,259,820
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable......................................................... $ 1,806,867 $1,605,533
Accrued salaries and benefits............................................ 346,037 352,903
Accrued sales and other taxes............................................ 117,951 102,367
Deferred membership income............................................... 228,927 --
Other current liabilities................................................ 162,488 136,139
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Total current liabilities.............................................. 2,662,270 2,196,942
LONG-TERM DEBT............................................................. 912,225 930,035
DEFERRED INCOME TAXES AND OTHER LIABILITIES................................ 61,283 61,483
----------- ----------
Total liabilities...................................................... 3,635,778 3,188,460
----------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST.......................................................... 114,924 105,474
----------- ----------
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; 220,742,490
and 217,589,000 shares issued and outstanding.......................... 2,207 2,176
Additional paid-in capital............................................... 928,283 817,628
Accumulated foreign currency translation................................. (105,466) (151,842)
Retained earnings........................................................ 2,542,044 2,297,924
----------- ----------
Total stockholders' equity............................................. 3,367,068 2,965,886
----------- ----------
$ 7,117,770 $6,259,820
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</TABLE>
The accompanying notes are an integral part of these financial statements
11
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COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
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MAY 9, 1999 MAY 10, 1998 MAY 9, 1999 MAY 10, 1998
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REVENUE
Net sales.............................................. $5,941,049 $5,241,926 $18,319,732 $16,260,280
Membership fees and other.............................. 112,771 96,160 324,524 302,575
----------- ------------ ------------ ------------
Total revenue........................................ 6,053,820 5,338,086 18,644,256 16,562,855
OPERATING EXPENSES
Merchandise costs...................................... 5,341,716 4,715,755 16,418,154 14,594,043
Selling, general and administrative.................... 528,158 466,987 1,590,713 1,416,430
Preopening expenses.................................... 6,120 8,884 20,778 20,298
Provision for impaired assets and warehouse closing
costs................................................ 1,500 1,500 6,500 3,500
----------- ------------ ------------ ------------
Operating income..................................... 176,326 144,960 608,111 528,584
OTHER INCOME (EXPENSE)
Interest expense....................................... (10,524) (10,477) (32,431) (32,365)
Interest income and other.............................. 10,659 7,562 27,890 19,025
----------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE.................................... 176,461 142,045 603,570 515,244
Provision for income taxes............................. 70,584 56,818 241,427 206,098
----------- ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE... 105,877 85,227 362,143 309,146
Cumulative effect of accounting change, net of tax..... -- -- 118,023 --
----------- ------------ ------------ ------------
NET INCOME............................................. $ 105,877 $ 85,227 $ 244,120 $ 309,146
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NET INCOME PER COMMON SHARE:
Basic earnings per share:
Income before cumulative effect of accounting
change........................................... $ 0.48 $ 0.39 $ 1.65 $ 1.44
Cumulative effect of accounting change, net of tax... -- -- (0.54) --
----------- ------------ ------------ ------------
Net income........................................... $ 0.48 $ 0.39 $ 1.11 $ 1.44
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Diluted earnings per share:
Income before cumulative effect of accounting
change........................................... $ 0.46 $ 0.38 $ 1.57 $ 1.37
Cumulative effect of accounting change, net of tax... (0.50)
----------- ------------ ------------ ------------
Net income........................................... $ 0.46 $ 0.38 $ 1.07 $ 1.37
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Shares used in calculation (000's)
Basic................................................ 220,219 215,913 218,984 214,779
Diluted.............................................. 236,785 232,378 235,181 230,808
Pro forma amounts assuming accounting change had been
in effect in fiscal 1998:
Net income........................................... $ 105,877 $ 84,730 $ 362,142 $ 296,283
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Earnings per common share--basic..................... $ 0.48 $ 0.39 $ 1.65 $ 1.38
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Earnings per common share--diluted................... $ 0.46 $ 0.37 $ 1.57 $ 1.31
</TABLE>
The accompanying notes are an integral part of these financial statements
12
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 WEEKS ENDED
----------------------------
MAY 9, 1999 MAY 10, 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 244,120 $ 309,146
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 150,722 130,862
Accretion of discount on zero coupon notes........... 11,255 10,989
Cumulative effect of accounting change, net of tax... 118,023 --
Change in receivables, accrued and other current
liabilities........................................ 148,793 72,204
Increase in merchandise inventories.................. (172,718) (209,883)
Increase in accounts payable......................... 156,401 202,694
Other................................................ (13,093) (5,609)
------------ -------------
Total adjustments.................................. 399,383 201,257
------------ -------------
Net cash provided by operating activities............ 643,503 510,403
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.................... (529,081) (366,609)
Proceeds from the sale of property and equipment....... 48,393 49,170
Increase in short term investments..................... (176,154) --
Investment in unconsolidated joint ventures............ (15,000) (4,000)
Other.................................................. (9,140) 1,245
------------ -------------
Net cash used in investing activities................ (680,982) (320,194)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on short-term borrowings.................. -- (24,940)
Increase (decrease) in bank checks outstanding......... 24,281 (7,133)
Net proceeds from long-term borrowings................. 3,461 2,338
Payments on long-term debt and notes payable........... (7,932) (5,489)
Proceeds from minority interests, net.................. 9,430 9,660
Exercise of stock options.............................. 49,104 53,388
------------ -------------
Net cash provided by financing activities............ 78,344 27,824
------------ -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................ 5,911 (1,859)
------------ -------------
Net increase in cash and cash equivalents............ 46,776 216,174
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......... 361,974 175,508
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $ 408,750 $ 391,682
------------ -------------
------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)................ $ 15,860 $ 17,891
Income taxes......................................... 178,794 174,731
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
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 May 9, 1999, Costco operated 288 warehouse clubs: 218 in the
United States (in 26 states); 58 in Canada (in nine Canadian provinces); seven
in the United Kingdom; three in Korea, one in Taiwan, and one in Japan. As of
May 9, 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
<PAGE>
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 $25,650 at May 9,
1999 and $23,650 at May 10, 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 $35,875 and $10,376 at May 9, 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 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
<PAGE>
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.
<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
---------------------------- ----------------------------
MAY 9, 1999 MAY 10, 1998 MAY 9, 1999 MAY 10, 1999
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income available to common stockholders used in
basic EPS............................................ $ 105,877 $ 85,227 $ 244,120 $ 309,146
Interest on convertible bonds, net of tax.............. 2,202 2,198 6,753 6,594
------------ ------------- ------------ -------------
Net income available to common stockholders after
assumed conversions of dilutive securities........... $ 108,079 $ 87,425 $ 250,873 $ 315,740
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
Weighted average number of common shares used in basic
EPS (000's).......................................... 220,219 215,913 218,984 214,779
Stock options (000's).................................. 6,619 6,246 6,069 5,810
Conversion of convertible bonds (000's)................ 9,947 10,219 10,128 10,219
------------ ------------- ------------ -------------
Weighted number of common shares and dilutive potential
common stock used in diluted EPS (000's)............. 236,785 232,378 235,181 230,808
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
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
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 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:
<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
---------------------------- ----------------------------
MAY 9, 1999 MAY 10, 1998 MAY 9, 1999 MAY 10, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income............................................. $ 105,877 $ 85,227 $ 244,120 $ 309,146
Other comprehensive income (expense):
Foreign currency translation......................... 13,180 (595) 46,376 (28,308)
Income tax (expense), benefit........................ (5,272) 238 (18,550) 11,323
------------ ------------- ------------ -------------
Other comprehensive income (expense), net of income
taxes............................................ 7,908 (357) 27,826 (16,985)
------------ ------------- ------------ -------------
Comprehensive income................................... $ 113,785 $ 84,870 $ 271,946 $ 292,161
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
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 May 9,
1999, no amount was outstanding under the loan facility or the commercial paper
program.
In addition, a wholly-owned Canadian subsidiary has a $137,000 commercial
paper program supported by a $96,000 bank credit facility with three Canadian
banks, of which $58,000 expires in March 2000, and $38,000 expires in March
2001. At May 9, 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 $521,000 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 $303,000. The outstanding
commitments under these facilities at May 9, 1999 totaled approximately
$125,000, including approximately $16,000 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-29-1999
<PERIOD-START> AUG-31-1998
<PERIOD-END> MAY-09-1999
<CASH> 408,750
<SECURITIES> 252,382
<RECEIVABLES> 122,067
<ALLOWANCES> 4,515
<INVENTORY> 2,104,256
<CURRENT-ASSETS> 3,081,639
<PP&E> 4,838,757
<DEPRECIATION> 1,067,652
<TOTAL-ASSETS> 7,117,770
<CURRENT-LIABILITIES> 2,662,270
<BONDS> 912,225
0
0
<COMMON> 930,490
<OTHER-SE> 2,436,578
<TOTAL-LIABILITY-AND-EQUITY> 7,117,770
<SALES> 18,319,732
<TOTAL-REVENUES> 18,644,256
<CGS> 16,418,154
<TOTAL-COSTS> 18,036,145
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,431
<INCOME-PRETAX> 603,570
<INCOME-TAX> 241,427
<INCOME-CONTINUING> 362,143
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 118,023
<NET-INCOME> 244,120
<EPS-BASIC> 1.11
<EPS-DILUTED> 1.07
</TABLE>
<PAGE>
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Costco Companies, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Costco Companies, Inc. (a Delaware corporation) and subsidiaries as of May 9,
1999, and the related condensed consolidated statements of income for the
twelve-week and thirty-six-week periods ended May 9, 1999 and May 10, 1998, and
the condensed consolidated statements of cash flows for the thirty-six-week
periods then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
May 25, 1999
18
