<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 22, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20355
------------------------
COSTCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0572969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
999 LAKE DRIVE
ISSAQUAH, WASHINGTON 98027
(Address of principal executive office)
(425) 313-8100
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /.
The registrant had 218,307,483 common shares, par value $.01, outstanding at
November 30, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
COSTCO COMPANIES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 1--FINANCIAL STATEMENTS.............................................. 3
Condensed Consolidated Balance Sheets................................... 8
Condensed Consolidated Statements of Operations......................... 9
Condensed Consolidated Statements of Cash Flows......................... 10
Notes to Condensed Consolidated Financial Statements.................... 11
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS................................................. 7
ITEM 2--CHANGES IN SECURITIES............................................. 7
ITEM 3--DEFAULTS UPON SENIOR SECURITIES................................... 7
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 7
ITEM 5--OTHER INFORMATION................................................. 7
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.................................. 7
Exhibit (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants................... 15
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Companies, Inc.'s (the "Company" or "Costco") unaudited condensed
consolidated balance sheet as of November 22, 1998, the condensed consolidated
balance sheet as of August 30, 1998, and the unaudited condensed consolidated
statements of income and cash flows for the 12-week periods ended November 22,
1998, and November 23, 1997, 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 the risks identified from time to
time in the Company's reports filed with the SEC.
COMPARISON OF THE 12 WEEKS ENDED NOVEMBER 22, 1998 AND NOVEMBER 23, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first quarter of fiscal 1999 were impacted by
a $118,023 non-cash, after-tax charge, reflecting the cumulative effect of the
Company's change in accounting policy for membership fees from a cash to a
deferred method, which resulted in a reported loss of $13,789, or $.05 per
share, for the quarter. Before the impact of this non-cash charge, net earnings
were $104,234, or $.46 per share (diluted), representing a 5% increase over last
year's first quarter reported net earnings of $97,926, or $.44 per share. On a
pro forma basis, assuming the newly adopted accounting treatment for deferring
membership fees had been in effect in fiscal 1998, net earnings in the first
quarter of fiscal 1998 would have been $87,967, or $.39 per share, and the
year-over-year first quarter earnings increase would have been 18%.
Net sales increased 11% to $5,894,238 during the first quarter of fiscal
1999 from $5,321,256 during the first 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 first 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 7 percent during the first 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 contribute to sales increases.
Membership fees and other revenue reflected a decrease of 4% to $103,840 or
1.76% of net sales in the first quarter of fiscal 1999 from $108,507 or 2.04% of
net sales in the first quarter of fiscal 1998. The decrease in membership fees
reflects the change from a cash to a deferred method of accounting for
membership fees 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
3
<PAGE>
treatment for deferring membership fees had been in effect in fiscal 1998,
membership fees and other in the first quarter of fiscal 1998 would have been
$91,909 and the year-over-year first quarter increase in membership fees and
other would have been 13%.
Gross margin (defined as net sales minus merchandise costs) increased 12% to
$606,453 or 10.29% of net sales in the first quarter of fiscal 1999 from
$541,960, or 10.18% of net sales in the first quarter of fiscal 1998. The 11
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, the expanded use of the Company's depot facilities,
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 first quarter of fiscal 1999 and 1998 each included a $2,500
LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.81% during the first quarter of fiscal 1999 from 8.85% during the
first 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 $10,707 or 0.18% of net sales during the first
quarter of fiscal 1999 compared to $7,343 or 0.14% of net sales during the first
quarter of fiscal 1998. Eight warehouses were opened in the first quarter of
fiscal 1999 (including two relocated warehouses), compared to eight warehouses
(including one relocated warehouse) opened during last year's first quarter. 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.
A provision for warehouse closing costs of $2,000 was recorded in the first
quarter of fiscal 1999 compared to $2,000 in the first quarter of fiscal 1998.
The provisions included estimated closing costs for warehouses closed in the
first quarter of each respective fiscal year, including closing costs associated
with warehouses which were relocated to new facilities.
Interest expense totaled $10,912 in the first quarter of fiscal 1999
compared to $10,923 in the first 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 $6,039 in the first quarter of fiscal 1999
compared to $3,720 in the first quarter of fiscal 1998. The increase primarily
reflects interest earned on higher balances of cash and cash equivalents during
the first quarter of fiscal 1999, as compared to the year-earlier first quarter
period.
The effective income tax rate on earnings in the first quarter of fiscal
1999 was 40.0% compared to a 40.0% effective tax rate in the first quarter of
fiscal 1998.
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 $600,000 during
fiscal 1999 in the United States and Canada for real estate, construction,
4
<PAGE>
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 $458,417 at
November 22, 1998), short-term borrowings under revolving credit facilities and
other financing sources as required.
Expansion plans are to open a net of 18 to 20 new warehouse clubs in fiscal
1999, plus seven relocations of existing warehouses to larger and better-located
facilities. During the first quarter of fiscal 1999, the Company opened a net of
six new warehouses (eight total openings, including two relocations). One
additional warehouse was opened in the second quarter prior to calendar
year-end. Expansion plans for the remainder of the fiscal year include 9 to 11
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 November 22, 1998,
Price Club Mexico operated 15 Price Club warehouses in Mexico including a
warehouse in Polanco, Mexico City which opened during the first quarter of
fiscal 1999. An additional warehouse was opened in Interlomas, Mexico City in
early December 1998, prior to the holiday season, bringing the Mexico warehouse
total to 16.
BANK CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN
US DOLLARS)
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of nine banks, of which $250,000
expires on January 25, 1999, and $250,000 expires on January 30, 2001. At
November 22, 1998, no amounts were outstanding under the loan facility or the
commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $129,000 commercial
paper program supported by a $91,000 bank credit facility with three Canadian
banks, which expires in March 1999. At November 22, 1998, 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 $591,000 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 $322,000. The outstanding
commitments under these facilities at November 22, 1998 totaled approximately
$126,000, including approximately $53,000 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 12 weeks of fiscal 1999 were not material to the Company's
results of operations or its financial position.
5
<PAGE>
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 21st Century. 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 anticipates
completing testing for all key systems by early calendar year 1999, 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 80% has been incurred by the Company through
November 22, 1998. 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 $311,000 at November 22, 1998 compared
to $431,000 at August 30, 1998. The decrease in working capital is primarily
attributable to deferred membership income of approximately $217,000, 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 $159,426 in the first 12
weeks of fiscal 1999 compared to $209,748 in the first 12 weeks 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 12
weeks of fiscal 1999 compared to the first 12 weeks of fiscal 1998, offset by
increased operating income and a positive change in net receivables, other
current assets, accrued and other current liabilities.
Net cash used in investing activities totaled $171,893 in the first 12 weeks
of fiscal 1999 compared to $182,258 in the first 12 weeks of fiscal 1998. The
investing activities primarily relate to additions to property and equipment for
new and remodeled warehouses of $182,566 and $187,039 in the first 12 weeks of
fiscal 1999 and 1998, respectively. The Company opened eight warehouses
(including two relocations) in the first 12 weeks of fiscal 1999 compared to
eight warehouses (including one relocation) opened in the first 12 weeks of
fiscal 1998. The first quarter of fiscal 1998 also included a payment to the
Hechinger Company for the acquisition of seven locations in Michigan, two of
which were subsequently sold.
Net cash provided by financing activities totaled $29,915 in the first 12
weeks of fiscal 1999 compared to $2,366 in the first 12 weeks of fiscal 1998.
The Company's balance sheet as of November 22, 1998 reflects a $784,657 or
13% increase in total assets since August 30, 1998. The increase is primarily
due to higher inventory levels associated with seasonal inventory needs leading
into the Christmas holiday season, and a net increase in property and equipment
primarily related to the Company's expansion program.
6
<PAGE>
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 is scheduled for 7:00 p.m. on January 28, 1999,
at the Meydenbauer Center, Center Hall A in Bellevue, Washington. Matters to be
voted on will be included in the Company's proxy statement to be filed with the
Securities and Exchange Commission and distributed to stockholders prior to the
meeting.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(27) Financial Data Schedule
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended November 22,
1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
<TABLE>
<S> <C> <C>
COSTCO COMPANIES, INC.
REGISTRANT
Date: December 18, 1998 By /s/ JAMES D. SINEGAL
-----------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: December 18, 1998 By /s/ RICHARD A. GALANTI
-----------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
7
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
AUGUST 30,
1998
NOVEMBER 22, ------------
1998
------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................................... $ 381,764 $ 361,974
Short-term investments............................................................. 76,653 75,549
Receivables, net................................................................... 200,747 171,613
Merchandise inventories, net....................................................... 2,430,667 1,910,751
Other current assets............................................................... 184,414 108,343
------------ ------------
Total current assets............................................................. 3,274,245 2,628,230
------------ ------------
PROPERTY AND EQUIPMENT
Land and land rights............................................................... 1,162,499 1,119,663
Buildings and leasehold and land improvements...................................... 2,278,144 2,170,896
Equipment and fixtures............................................................. 995,429 948,515
Construction in progress........................................................... 71,110 91,901
------------ ------------
4,507,182 4,330,975
Less-accumulated depreciation and amortization..................................... (975,764) (935,603)
------------ ------------
Net property and equipment....................................................... 3,531,418 3,395,372
------------ ------------
OTHER ASSETS 238,814 236,218
------------ ------------
$7,044,477 $ 6,259,820
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................................... $2,059,702 $ 1,605,533
Accrued salaries and benefits...................................................... 373,702 352,903
Accrued sales and other taxes...................................................... 118,233 102,367
Deferred membership income......................................................... 216,803 --
Other current liabilities.......................................................... 194,992 136,139
------------ ------------
Total current liabilities........................................................ 2,963,432 2,196,942
LONG-TERM DEBT....................................................................... 932,683 930,035
DEFERRED INCOME TAXES AND OTHER LIABILITIES.......................................... 61,687 61,483
------------ ------------
Total liabilities................................................................ 3,957,802 3,188,460
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST.................................................................... 106,350 105,474
------------ ------------
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;
218,214,000 and 217,589,000 shares issued and outstanding........................ 2,182 2,176
Additional paid-in capital......................................................... 828,702 817,628
Accumulated foreign currency translation........................................... (134,694) (151,842)
Retained earnings.................................................................. 2,284,135 2,297,924
------------ ------------
Total stockholders' equity....................................................... 2,980,325 2,965,886
------------ ------------
$7,044,477 $ 6,259,820
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
8
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
--------------------------
NOVEMBER 22, NOVEMBER 23,
1998 1997
------------ ------------
<S> <C> <C>
REVENUE
Net sales............................................................................ $5,894,238 $5,321,256
Membership fees and other............................................................ 103,840 108,507
------------ ------------
Total revenue...................................................................... 5,998,078 5,429,763
OPERATING EXPENSES
Merchandise costs.................................................................... 5,287,785 4,779,296
Selling, general and administrative.................................................. 518,990 470,711
Preopening expenses.................................................................. 10,707 7,343
Provision for impaired assets and warehouse closing costs............................ 2,000 2,000
------------ ------------
Operating income................................................................... 178,596 170,413
OTHER INCOME (EXPENSE)
Interest expense..................................................................... (10,912) (10,923)
Interest income and other............................................................ 6,039 3,720
------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE................ 173,723 163,210
Provision for income taxes........................................................... 69,489 65,284
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE................................. 104,234 97,926
Cumulative effect of accounting change, net of tax................................... (118,023) --
------------ ------------
NET INCOME (LOSS).................................................................... $ (13,789) $ 97,926
------------ ------------
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE:
Basic earnings per share:
Income before cumulative effect of accounting change............................. $ .48 $ .46
Cumulative effect of accounting change, net of tax............................... (.54) --
------------ ------------
Net income (loss)................................................................ $ (.06) $ .46
------------ ------------
------------ ------------
Diluted earnings per share:
Income before cumulative effect of accounting change............................. $ .46 $ .44
Cumulative effect of accounting change, net of tax............................... (.51) --
------------ ------------
Net income (loss)................................................................ $ (.05) $ .44
------------ ------------
------------ ------------
Shares used in calculation (000's)...................................................
Basic.............................................................................. 217,838 213,833
Diluted............................................................................ 233,387 229,413
Pro forma amounts assuming accounting change had been in effect in fiscal 1998:
Net income......................................................................... $ 104,234 $ 87,967
------------ ------------
------------ ------------
Earnings per common share--basic................................................... $ .48 $ .41
------------ ------------
------------ ------------
Earnings per common share--diluted................................................. $ .46 $ .39
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
--------------------------
NOVEMBER 22, NOVEMBER 23,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................... $ (13,789) $ 97,926
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 47,762 42,515
Accretion of discount on zero coupon notes......................................... 3,793 3,663
Cumulative effect of accounting change, net of tax................................. 118,023 --
Change in receivables, accrued and other current liabilities....................... 89,236 36,362
Increase in merchandise inventories................................................ (515,840) (417,990)
Increase in accounts payable....................................................... 433,130 448,663
Other.............................................................................. (2,889) (1,391)
------------ ------------
Total adjustments................................................................ 173,215 111,822
------------ ------------
Net cash provided by operating activities.......................................... 159,426 209,748
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.................................................. (182,566) (187,039)
Proceeds from the sale of property and equipment..................................... 13,801 6,861
Other................................................................................ (3,128) (2,080)
------------ ------------
Net cash used in investing activities.............................................. (171,893) (182,258)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on short-term borrowings................................................ -- (13,274)
Increase (decrease) in bank checks outstanding....................................... 18,647 (5,296)
Net proceeds from long-term borrowings............................................... 1,610 2,338
Payments on long-term debt and notes payable......................................... (2,374) (1,809)
Proceeds from minority interests, net................................................ 902 10,192
Exercise of stock options............................................................ 11,130 10,215
------------ ------------
Net cash provided by financing activities.......................................... 29,915 2,366
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2,342 329
------------ ------------
Net increase in cash and cash equivalents.......................................... 19,790 30,185
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................................... 361,974 175,508
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 381,764 $ 205,693
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized).............................................. $ 1,335 $ 2,741
Income taxes....................................................................... 18,968 28,018
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<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 November 22, 1998, Costco operated 284 warehouse clubs: 216 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 November
22, 1998, the Company also operated (through a 50%-owned joint venture) 15
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,
11
<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 $18,650 at both
November 22, 1998 and November 23, 1997.
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 $29,162 and $10,376 at November 22, 1998 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 has resulted in a one-time, non-cash, pre-tax charge of approximately
$197,000 ($118,000 after-tax, or $.51 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 first quarter of fiscal 1998 earnings per share amounts have been
changed to conform to Financial Accounting Standards Board (FASB) Statement No.
128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 established new standards
for computing and presenting earnings per share (EPS) for entities with
publicly-held common stock.
12
<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
--------------------------
NOVEMBER 22, NOVEMBER 23,
1998 1997
------------ ------------
<S> <C> <C>
Net (loss) income available to common stockholders used in basic
EPS............................................................ $ (13,789) $ 97,926
Interest on convertible bonds.................................... 2,276 2,198
------------ ------------
Net (loss) income available to common stockholders after assumed
conversions of dilutive securities............................. $ (11,513) $ 100,124
------------ ------------
------------ ------------
Weighted average number of common shares used in basic EPS
(000's)........................................................ 217,838 213,833
Stock options (000's)............................................ 5,330 5,361
Conversion of convertible bonds (000's).......................... 10,219 10,219
------------ ------------
Weighted number of common shares and dilutive potential common
stock used in diluted EPS (000's).............................. 233,387 229,413
------------ ------------
------------ ------------
</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.
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
--------------------------
NOVEMBER 22, NOVEMBER 23,
1998 1997
------------ ------------
<S> <C> <C>
Net income (loss)................................................ $ (13,789) $ 97,926
Other comprehensive income (expense):
Foreign currency translation................................... 17,148 (10,138)
Income tax (expense), benefit.................................. (6,859) 4,055
------------ ------------
Other comprehensive income (expense), net of income taxes.... 10,289 (6,083)
------------ ------------
Comprehensive income (loss)...................................... $ (3,500) $ 91,843
------------ ------------
------------ ------------
</TABLE>
13
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (3)--DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of nine banks, of which $250,000
expires on January 15, 1999, and $250,000 expires on January 30, 2001. At
November 22, 1998, no amount was outstanding under the loan facility or the
commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $129,000 commercial
paper program supported by a $91,000 bank credit facility with three Canadian
banks, which expires in March 1999. At November 22, 1998, 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 $601,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $322,000. The outstanding
commitments under these facilities at November 22, 1998 totaled approximately
$126,000, 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.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1999
<PERIOD-START> AUG-31-1998
<PERIOD-END> NOV-22-1998
<CASH> 381,764
<SECURITIES> 76,653
<RECEIVABLES> 205,084
<ALLOWANCES> 4,337
<INVENTORY> 2,430,667
<CURRENT-ASSETS> 3,274,245
<PP&E> 4,507,182
<DEPRECIATION> 975,764
<TOTAL-ASSETS> 7,044,477
<CURRENT-LIABILITIES> 2,963,432
<BONDS> 932,683
0
0
<COMMON> 830,884
<OTHER-SE> 2,149,441
<TOTAL-LIABILITY-AND-EQUITY> 7,044,477
<SALES> 5,894,238
<TOTAL-REVENUES> 5,998,078
<CGS> 5,287,785
<TOTAL-COSTS> 5,819,482
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,912
<INCOME-PRETAX> 173,723
<INCOME-TAX> 69,489
<INCOME-CONTINUING> 104,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 118,023
<NET-INCOME> (13,789)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.05)
</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 November
22, 1998, and the related condensed consolidated statements of operations for
the twelve-week periods ended November 22, 1998 and November 23, 1997, and the
condensed consolidated statements of cash flows for the twelve-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
December 15, 1998
15
