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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 21, 1999
</TABLE>
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NUMBER 0-20355
------------------------
COSTCO WHOLESALE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
WASHINGTON 91-1223280
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
</TABLE>
999 LAKE DRIVE, ISSAQUAH, WA 98027
(Address of principal executive office)
(Zip Code)
(Registrant's telephone number, including area code): (425) 313-8100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ----------------------------------------- -----------------------------------------
Common Stock $.01 Par Value The Nasdaq National Market
</TABLE>
------------------------
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 222,312,104 common shares, par value $.01, outstanding at
November 30, 1999.
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<PAGE>
COSTCO WHOLESALE CORPORATION
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
<TABLE>
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PAGE
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ITEM 1--FINANCIAL STATEMENTS................................ 3
Condensed Consolidated Balance Sheets..................... 9
Condensed Consolidated Statements of Operations........... 10
Condensed Consolidated Statements of Cash Flows........... 11
Notes to Condensed Consolidated Financial Statements...... 12
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS................................... 7
ITEM 2--CHANGES IN SECURITIES............................... 7
ITEM 3--DEFAULTS UPON SENIOR SECURITIES..................... 7
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 7
ITEM 5--OTHER INFORMATION................................... 7
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.................... 7
Exhibit (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants..... 18
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Wholesale Corporation's ("Costco" or the "Company") unaudited
condensed consolidated balance sheet as of November 21, 1999, and the condensed
consolidated balance sheet as of August 29, 1999, unaudited condensed
consolidated statements of operations and cash flows for the 12-week periods
ended November 21, 1999 and November 22, 1998, are included elsewhere herein.
Also, included elsewhere herein are notes to the unaudited condensed
consolidated financial statements and the results of the limited review
performed by Arthur Andersen LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 2000 is a
53-week year with period 13 ending on September 3, 2000. The first, second, and
third quarters consist of 12 weeks each and the fourth quarter consists of 17
weeks.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this document constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. For these purposes, forward-looking statements are statements that address
activities, events, conditions or developments that the company expects, or
anticipates may occur in the future. Such forward-looking statements involve
risks and uncertainties that may cause actual events, results or performance to
differ materially from those indicated by such statements. These risks and
uncertainties include, but are not limited to, domestic and international
economic conditions including exchange rates, the effects of competition and
regulation, conditions affecting the acquisition, development and ownership or
use of real estate, actions of vendors, 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 1999 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED NOVEMBER 21, 1999 AND NOVEMBER 22, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the first quarter of fiscal 2000 was $129,318, or $.56 per
diluted share. Excluding the impact of a one-time accounting charge taken in
last year's first quarter, net income for the first quarter of fiscal 1999 was
$104,234, or $.46 per diluted share, resulting in year-over-year earnings and
earnings per share increases of 24% and 22%, respectively. In last year's first
quarter, the Company recorded 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, whereby membership fee income is recognized
ratably over the one-year life of the membership. Including this one-time
charge, the Company last year reported a loss of $13,789 or $.05 per diluted
share for the first quarter of fiscal 1999.
Net sales increased 16% to $6,824,197 during the first quarter of fiscal
2000, from $5,894,238 during the first quarter of fiscal 1999. This increase was
due to opening a net of 14 new warehouses (19 opened, 5 closed) since the end of
the first quarter of fiscal 1999 and an increase in comparable warehouse sales.
Comparable sales, that is sales in warehouses open for at least a year,
increased 13% during the first quarter of fiscal 2000, reflecting new marketing
and merchandising efforts, including the rollout of various ancillary businesses
to certain existing locations. Changes in prices of merchandise did not
materially contribute to sales increases.
Membership fees and other revenue increased 15% to $119,315 or 1.75% of net
sales in the first quarter of fiscal 2000 from $103,840 or 1.76% of net sales in
the first quarter of fiscal 1999. Membership fees include new membership
sign-ups at the new warehouses opened since the end of the first quarter of
3
<PAGE>
fiscal 1999. Membership fees in both fiscal years 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
Gross margin (defined as net sales minus merchandise costs) increased 16% to
$703,996 or 10.32% of net sales in the first quarter of fiscal 2000 from
$606,453 or 10.29% of net sales in the first quarter of fiscal 1999. The three
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 and improved performance of its international
operations, offset by the Company's on-going efforts to continually lower prices
to its members. The gross margin figures reflect accounting for merchandise
costs on the last-in, first-out (LIFO) method. The first quarter of fiscal 2000
and 1999 each included a $2,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.74% during the first quarter of fiscal 2000 from 8.81% during the
first quarter of fiscal 1999. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable warehouse sales noted above, and a year-over-year expense improvement
at the Company's core warehouse operations and Central and Regional
administrative offices, which was partially offset by higher expenses associated
with international expansion and continued expansion and rollout of certain
ancillary businesses.
Preopening expenses totaled $10,334 or 0.15% of net sales during the first
quarter of fiscal 2000 compared to $10,707 or 0.18% of net sales during the
first quarter of fiscal 1999. Six warehouses were opened in the first quarter of
fiscal 2000 compared to eight warehouses (including two relocated warehouses)
opened during last year's first quarter. Preopening expenses also include costs
related to remodels, including expanded fresh foods and ancillary operations at
existing warehouses, as well as costs associated with expanding international
operations.
A provision for warehouse closing costs of $1,000 was recorded in the first
quarter of fiscal 2000 compared to $2,000 in the first quarter of fiscal 1999.
The provisions include estimated closing costs for warehouses being relocated to
new facilities during the fiscal year.
Interest expense totaled $10,397 in the first quarter of fiscal 2000
compared to $10,912 in the first quarter of fiscal 1999. Interest expense
primarily includes interest on the 3 1/2% Zero Coupon Notes and the 7 1/8%
Senior Notes. The decrease in interest expense is primarily attributable to an
increase in capitalized interest related to construction and remodel projects.
Interest income and other totaled $10,667 in the first quarter of fiscal
2000 compared to $6,039 in the first quarter of fiscal 1999. The increase
primarily reflects interest earned on higher balances of cash and cash
equivalents and short-term investments during the first quarter of fiscal 2000,
as compared to the first quarter of fiscal 1999.
The effective income tax rate on earnings in the first quarter of both
fiscal 2000 and 1999 was 40%.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
EXPANSION PLANS
Costco's primary requirement for capital is the financing of the land,
building and equipment costs for new warehouses plus the costs of initial
warehouse operations and working capital requirements, as well as additional
capital for international expansion either directly or through investments in
foreign subsidiaries and joint ventures.
While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $800,000 to $950,000 during
fiscal 2000 in the United States and Canada for real estate, construction,
4
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remodeling and equipment for warehouse clubs and related operations; and
approximately $100,000 to $150,000 for international expansion, including the
United Kingdom, Asia, Mexico and other potential ventures. These expenditures
will be financed with a combination of cash provided from operations, the use of
cash and cash equivalents and short-term investments (which totaled $716,003 at
November 21, 1999), short-term borrowings under revolving credit facilities and
other financing sources as required.
Expansion plans for the United States and Canada during fiscal 2000 are to
open approximately 20 to 25 new warehouse clubs, including four to six
relocations of existing warehouses to larger and better-located facilities. The
Company expects to continue expansion of its international operations and plans
to open two to three additional units in the United Kingdom through its
60%-owned subsidiary and an additional unit in Taiwan through its 55%-owned
subsidiary during the next year. Other international markets are being assessed.
Costco and its Mexico-based joint venture partner, Controladora Comercial
Mexicana, each own a 50% interest in Price Club Mexico. As of November 21, 1999,
Price Club Mexico operated 17 warehouses in Mexico and plans to open two new
warehouse clubs during fiscal 2000.
BANK CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS
(ALL AMOUNTS STATED IN US DOLLARS)
The Company has in place a $425,000 commercial paper program supported by a
$425,000 bank credit facility with a group of nine banks, of which $175,000
expires on January 24, 2000, and $250,000 expires on January 30, 2001. At
November 21, 1999, no amounts were outstanding under the loan facility or the
commercial paper program. The Company expects to renew for an additional
one-year term the $175,000 portion of the loan facility expiring on January 24,
2000, at substantially the same terms.
In addition, a wholly-owned Canadian subsidiary has a $134,000 commercial
paper program supported by a $94,000 bank credit facility with three Canadian
banks, of which $57,000 expires in March 2000, and $37,000 expires in
March 2001. At November 21, 1999, no amounts were outstanding under the bank
credit facility or the Canadian commercial paper program. The Company expects to
renew for an additional one-year term the $57,000 portion of the loan facility
expiring on March, 2000, at substantially the same terms.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $519,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit) totaling approximately $294,000. The outstanding
commitments under these facilities at November 21, 1999, totaled approximately
$119,000, including approximately $44,800 in standby letters of credit.
DERIVATIVES
The Company uses derivative financial instruments only to manage
well-defined interest rate and foreign exchange risks. Forward foreign exchange
contracts are used to hedge the impact of fluctuations of foreign exchange on
inventory purchases. The amount of interest rate and foreign exchange contracts
outstanding at quarter-end or in place during the first 12 weeks of fiscal 2000
were not material to the Company's results of operations or its financial
position.
Effective December 10, 1999, the Company entered into a "fixed-to-floating"
interest rate swap agreement on its $300,000 7 1/8% senior notes, replacing the
fixed interest rate with a floating rate indexed to the 30-day commercial paper
rate.
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 has been 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 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 systems, warehouse refrigeration, etc.
As of November 21, 1999, the Company has substantially completed the
necessary remediation and testing of virtually 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 95% through
November 21, 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.
Where needed, the Company has established contingency plans based on assessment
of its supplier base and evaluation of outside risks.
FINANCIAL POSITION AND CASH FLOWS
Working capital totaled approximately $442,000 at November 21, 1999,
compared to $450,000 at August 29, 1999. Working capital was positively affected
by a $19,000 increase in cash and cash equivalents and short-term investments,
an increase in net inventory levels (inventories less accounts payable) of
$24,000, an increase in receivables of $8,000 and an increase in other current
assets of $29,000, which increases were largely offset by an increase in
deferred membership income of $19,000 (the result of accounting for membership
fees on a deferred basis), and an increase in tax accruals and other current
liabilities of $69,000.
Net cash provided by operating activities totaled $240,011 in the first 12
weeks of fiscal 2000 compared to $159,426 in the first 12 weeks of fiscal 1999.
The year-over-year increase in net cash from operating activities is primarily a
result of increased net income, adjusted for the non-cash cumulative effect of
accounting change in fiscal 1999, and an increase in the percentage of inventory
financed through accounts payable, during the first 12 weeks of fiscal 2000
compared to the first 12 weeks of fiscal 1999, offset by a reduction in the
change in net receivables, other current assets and accrued and other current
liabilities.
Net cash used in investing activities totaled $139,040 in the first 12 weeks
of fiscal 2000 compared to $171,893 in the first 12 weeks of fiscal 1999. The
investing activities primarily relate to additions to property and equipment for
new and remodeled warehouses of $238,471 and $182,566 in the first 12 weeks
6
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of fiscal 2000 and 1999, respectively. The Company opened six warehouses in the
first 12 weeks of fiscal 2000 and has plans to open 20 to 23 new warehouses
(including four to six relocations) during the remainder of the fiscal year
compared to 21 new warehouses (including seven relocations) opened during fiscal
1999. Net cash used in investing activities also reflects a decrease in
short-term investments of $91,874 since the beginning of fiscal year 2000.
Net cash provided by financing activities totaled $7,246 in the first 12
weeks of fiscal 2000 compared to $29,915 in the first 12 weeks of fiscal 1999.
This decrease is primarily attributable to a decrease in bank checks
outstanding.
The Company's balance sheet as of November 21, 1999 reflects a $743,045 or
10% increase in total assets since August 29, 1999. The increase is primarily
due to increases in merchandise inventory and property and equipment primarily
related to the Company's expansion program.
PART II--OTHER INFORMATION
(DOLLARS IN THOUSANDS)
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of its operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting is scheduled for 10:00 a.m. on January 27, 2000
at the Doubletree Hotel, 300--112(th) Ave SE, in Bellevue, Washington. Matters
to be voted on will be included in the Company's proxy statement filed with the
Securities and Exchange Commission and distributed to shareholders 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) Current reports on Form 8-K filed on August 30, 1999 and December 9,
1999.
7
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Costco Wholesale Corporation
REGISTRANT
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<S> <C>
Date: December 17, 1999 /s/ JAMES D. SINEGAL
---------------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: December 17, 1999 /s/ RICHARD A. GALANTI
---------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
</TABLE>
8
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
NOVEMBER 21, AUGUST 29,
1999 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 550,917 $ 440,586
Short-term investments.................................... 165,086 256,688
Receivables, net.......................................... 176,889 168,648
Merchandise inventories, net.............................. 2,706,103 2,210,475
Other current assets...................................... 268,822 239,516
----------- -----------
Total current assets.................................... 3,867,817 3,315,913
----------- -----------
PROPERTY AND EQUIPMENT
Land and land rights...................................... 1,315,815 1,264,125
Buildings and leasehold and land improvements............. 2,605,572 2,444,640
Equipment and fixtures.................................... 1,189,099 1,138,568
Construction in progress.................................. 159,869 176,824
----------- -----------
5,270,355 5,024,157
Less-accumulated depreciation and amortization............ (1,167,430) (1,117,269)
----------- -----------
Net property and equipment.............................. 4,102,925 3,906,888
----------- -----------
OTHER ASSETS................................................ 277,304 282,200
----------- -----------
$ 8,248,046 $ 7,505,001
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 2,384,571 $ 1,912,632
Accrued salaries and benefits............................. 412,627 414,276
Accrued sales and other taxes............................. 139,687 122,932
Deferred membership income................................ 245,074 225,903
Other current liabilities................................. 244,228 190,490
----------- -----------
Total current liabilities............................... 3,426,187 2,866,233
LONG-TERM DEBT.............................................. 921,175 918,888
DEFERRED INCOME TAXES AND OTHER LIABILITIES................. 69,532 66,990
----------- -----------
Total liabilities....................................... 4,416,894 3,852,111
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................................... 128,276 120,780
----------- -----------
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; 222,174,000 and 221,368,000 shares issued
and outstanding......................................... 2,222 2,214
Additional paid-in capital................................ 979,852 952,758
Other accumulated comprehensive loss...................... (103,738) (118,084)
Retained earnings......................................... 2,824,540 2,695,222
----------- -----------
Total stockholders' equity.............................. 3,702,876 3,532,110
----------- -----------
$ 8,248,046 $ 7,505,001
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets
9
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
---------------------------
NOVEMBER 21, NOVEMBER 22,
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Net sales................................................... $6,824,197 $5,894,238
Membership fees and other................................... 119,315 103,840
---------- ----------
Total revenue............................................. 6,943,512 5,998,078
OPERATING EXPENSES
Merchandise costs........................................... 6,120,201 5,287,785
Selling, general and administrative......................... 596,717 518,990
Preopening expenses......................................... 10,334 10,707
Provision for impaired assets and warehouse closing costs... 1,000 2,000
---------- ----------
Operating income.......................................... 215,260 178,596
OTHER INCOME (EXPENSE)
Interest expense............................................ (10,397) (10,912)
Interest income and other................................... 10,667 6,039
---------- ----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE......................................... 215,530 173,723
Provision for income taxes.................................. 86,212 69,489
---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE........ 129,318 104,234
Cumulative effect of accounting change, net of tax.......... -- (118,023)
---------- ----------
NET INCOME (LOSS)........................................... $ 129,318 $ (13,789)
========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Basic earnings per share:
Income before cumulative effect of accounting change.... $ .58 $ .48
Cumulative effect of accounting change, net of tax...... -- (.54)
---------- ----------
Net Income (Loss)....................................... $ .58 $ (.06)
========== ==========
Diluted earnings per share:
Income before cumulative effect of accounting change.... $ .56 $ .46
Cumulative effect of accounting change, net of tax...... -- (.51)
---------- ----------
Net Income (Loss)....................................... $ .56 $ (.05)
========== ==========
Shares used in calculation (000's)
Basic..................................................... 221,650 217,838
Diluted................................................... 236,707 233,387
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
---------------------------
NOVEMBER 21, NOVEMBER 22,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 129,318 $ (13,789)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 55,861 47,762
Accretion of discount on zero coupon notes.............. 3,718 3,793
Cumulative effect of accounting change, net of tax...... -- 118,023
Change in receivables, other current assets, accrued and
other current liabilities............................. 60,859 89,236
Increase in merchandise inventories..................... (487,573) (515,840)
Increase in accounts payable............................ 480,511 433,130
Other................................................... (2,683) (2,889)
--------- ---------
Total adjustments..................................... 110,693 173,215
--------- ---------
Net cash provided by operating activities............... 240,011 159,426
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment....................... (238,471) (182,566)
Proceeds from the sale of property and equipment.......... 12,919 13,801
Change in short-term investments.......................... 91,874 (1,104)
Other..................................................... (5,362) (2,024)
--------- ---------
Net cash used in investing activities................... (139,040) (171,893)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from long-term borrowings.................... 253 1,610
Repayments of long-term debt.............................. (2,752) (2,374)
Changes in bank checks outstanding........................ (14,146) 18,647
Proceeds from minority interests.......................... 7,272 902
Exercise of stock options................................. 16,619 11,130
--------- ---------
Net cash provided by financing activities............... 7,246 29,915
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 2,114 2,342
--------- ---------
Net increase in cash and cash equivalents................. 110,331 19,790
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 440,586 361,974
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 550,917 $ 381,764
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized)..................... $ 1,679 $ 1,335
Income taxes.............................................. 34,546 18,968
</TABLE>
The accompanying notes are an integral part of these financial statements
11
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COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the fiscal year ended August 29, 1999.
The consolidated financial statements include the accounts of Costco
Wholesale Corporation, a Washington corporation, and its subsidiaries ("Costco"
or the "Company"). All inter-company transactions between the Company and its
subsidiaries, including The Price Company, have been eliminated in
consolidation. The Price Company and Costco Wholesale Corporation primarily
operate membership warehouses under the Costco Wholesale name.
Costco operates membership warehouses that offer very low prices on a
limited selection of nationally branded and selected private label products in a
wide range of merchandise categories in no-frills, self-service warehouse
facilities. At November 21, 1999, Costco operated 298 warehouse clubs: 226 in
the United States; 59 in Canada; seven in the United Kingdom; three in Korea;
two in Taiwan; and one in Japan. As of November 21, 1999, the Company also
operated (through a 50%-owned joint venture) 17 warehouses in Mexico. The
Company also operates Costco Online, an electronic commerce web site, at
www.costco.com.
The Company's investment in the Price Club Mexico joint venture and in other
unconsolidated joint ventures that are less than majority owned are accounted
for under the equity method.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year basis, which ends on the
Sunday nearest August 31(st). Fiscal year 2000 is a 53-week year, with the
first, second and third quarters consisting of 12 weeks each and the fourth
quarter, ending September 3, 2000, consisting of 17 weeks. Fiscal year 1999 was
a 52-week year.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
12
<PAGE>
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS
At November 21, 1999 and August 29, 1999 short term investments consisted of
the following:
<TABLE>
<CAPTION>
NOVEMBER 21, 1999 AUGUST 29, 1999
----------------- ---------------
<S> <C> <C>
Municipal securities.......................... $ 48,805 $ 97,966
Corporate notes and bonds..................... 96,751 89,872
U.S. Treasury/Agency securities............... 2,016 43,699
Certificates of deposit....................... 17,514 24,841
Other......................................... -- 310
-------- --------
Total short-term investments................ $165,086 $256,688
======== ========
</TABLE>
The Company's short-term investments have been designated as being
available-for-sale. The fair market value of short-term investments approximates
their carrying value and unrealized holding gains and losses were not
significant at November 21, 1999 or August 29, 1999. Realized gains and losses
are included in interest income and were not significant in the first quarter of
fiscal 2000 or 1999.
RECEIVABLES
Receivables consist primarily of vendor rebates and promotional allowances
and other miscellaneous amounts due to the Company, and are net of allowance for
doubtful accounts of $4,274 and $4,582 at November 21, 1999 and August 29, 1999.
MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of cost or market as
determined primarily by the retail inventory method, and are stated using the
last-in, first-out (LIFO) method for substantially all U.S. merchandise
inventories. The Company believes the LIFO method more fairly presents the
results of operations by more closely matching current costs with current
revenues. If all merchandise inventories had been valued using the first-in,
first-out (FIFO) method, inventories would have been higher by $13,650 at
November 21, 1999 and $12,150 at August 29, 1999. The Company provides for
estimated inventory losses between physical inventory counts on the basis of a
standard percentage of sales. This provision is adjusted to reflect the actual
shrinkage results of physical inventory counts, which generally occur in the
second and fourth fiscal quarters.
ACCOUNTS PAYABLE
The Company's banking system provides for the daily replenishment of major
bank accounts as checks are presented. Accordingly, included in Accounts Payable
are $7,116 and $21,081 at November 21, 1999 and August 29, 1999, respectively,
representing the excess of outstanding checks over cash on deposit at the banks
on which the checks were drawn.
13
<PAGE>
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MEMBERSHIP FEES
Membership fee revenue represents annual membership fees paid by
substantially all of the Company's members. Effective with the first quarter of
fiscal 1999, the Company changed its method of accounting for membership fee
income from a "cash basis" to a "deferred basis" whereby membership fee income
is recognized ratably over the one-year life of the membership. The change to
the deferred method of accounting for membership fees resulted in a one-time,
non-cash, pre-tax charge of approximately $196,705 ($118,023 after-tax, or $.51
per diluted share) to reflect the cumulative effect of the accounting change as
of the beginning of fiscal 1999.
WAREHOUSE CLOSING COSTS
The Company recorded a charge of $30,865 for warehouse and other facility
closing costs in fiscal 1999. In the first quarter of fiscal 2000, the Company
recorded an additional charge of $1,000 net warehouse closing costs. At
November 21, 1999 the reserve for warehouse closing costs was $22,700, primarily
representing future lease obligations. Warehouse closing costs incurred relate
principally to the Company's efforts to relocate certain warehouses that were
not otherwise impaired to larger and better-located facilities.
INCOME TAXES
Deferred income taxes are provided to reflect temporary differences between
the financial and tax bases of assets and liabilities using presently enacted
tax rates and laws.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The following data show the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.
<TABLE>
<CAPTION>
12 WEEKS ENDED
-------------------------------------
NOVEMBER 21, 1999 NOVEMBER 22, 1999
----------------- -----------------
<S> <C> <C>
Net income available to common stockholders
used in basic EPS......................... $129,318 $(13,789)
Interest on convertible bonds, net of tax... 2,276 2,276
-------- --------
Net income/(loss) available to common
stockholders after assumed conversions of
dilutive securities....................... $131,594 $(11,513)
-------- --------
Weighted average number of common shares
used in basic EPS (000's)................. 221,650 217,838
Stock options (000's)....................... 5,383 5,330
Conversion of convertible bonds (000's)..... 9,674 10,219
-------- --------
Weighted number of common shares and
dilutive potential common stock used in
diluted EPS (000's)....................... 236,707 233,387
-------- --------
</TABLE>
14
<PAGE>
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES
The Company uses derivative financial instruments only to manage
well-defined interest rate and foreign exchange risks. Forward foreign exchange
contracts are used to hedge the impact of fluctuations of foreign exchange on
inventory purchases. The amount of interest rate and foreign exchange contracts
outstanding at quarter-end or in place during the first 12 weeks of fiscal 2000
were not material to the Company's results of operations or its financial
position.
Effective December 10, 1999, the Company entered into a "fixed-to-floating"
interest rate swap agreement on its $300,000 7 1/8% senior notes, replacing the
fixed interest rate with a floating rate indexed to the 30-day commercial paper
rate.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which established accounting and reporting
standards for derivative instruments and for hedging activities. In June 1999,
the FASB issued SFAS No. 137, which deferred the effective date of
SFAS No. 133 for the Company to the beginning of its fiscal 2001. Presently, the
Company believes that SFAS No. 133 would not have a material impact on its
results of operations or financial position.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE (2)--COMPREHENSIVE INCOME
Effective with the first quarter of fiscal 1999 the Company adopted SFAS
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 21, 1999 NOVEMBER 22, 1998
----------------- -----------------
<S> <C> <C>
Net income (loss)........................... $129,318 $(13,789)
Other comprehensive income (expense):
Foreign currency translation.............. 14,346 17,148
Income tax expense........................ (5,738) (6,859)
-------- --------
Other comprehensive income (expense),
net of income taxes................... 8,608 10,289
-------- --------
Comprehensive income (loss)................. $137,926 $ (3,500)
======== ========
</TABLE>
15
<PAGE>
COSTCO WHOLESALE CORPORATION
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 $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
November 21, 1999 no amount was outstanding under the loan facility or the
commercial paper program. The Company expects to renew for an additional
one-year term the $175,000 portion of the loan facility expiring on January 24,
2000, at substantially the same terms.
In addition, a wholly-owned Canadian subsidiary has a $134,000 commercial
paper program supported by a $94,000 bank credit facility with three Canadian
banks, of which $57,000 expires in March 2000, and $37,000 expires in
March 2001. At November 21 1999, no amount was outstanding under the bank credit
facility or the Canadian commercial paper program. The Company expects to renew
for an additional one-year term the $57,000 portion of the loan facility
expiring on March, 2000, at substantially the same terms.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $519,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $294,200 The outstanding
commitments under these facilities at November 21, 1999 totaled approximately
$119,900, including $44,800 in standby letters of credit.
NOTE (4)--COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone of in
the aggregate, will have a material adverse effect on the Company's financial
position or results in operations.
NOTE (5)--SEGMENT REPORTING
The Company and its subsidiaries are principally engaged in the operation of
membership warehouses in the United States, Canada, Japan; through
majority-owned subsidiaries in the United Kingdom, Taiwan
16
<PAGE>
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (5)--SEGMENT REPORTING (CONTINUED)
and Korea; and through a 50%-owned joint venture in Mexico. The Company's
reportable segments are based on management responsibility.
<TABLE>
<CAPTION>
OTHER
UNITED STATES CANADIAN INTERNATIONAL
OPERATIONS OPERATIONS OPERATIONS TOTAL
------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
QUARTER ENDED NOVEMBER 21, 1999
Total revenue............................. $ 5,609,934 $1,049,367 $284,211 $ 6,943,512
Operating income (loss)................... 175,139 41,948 (1,827) 215,260
Depreciation and amortization............. 43,397 7,941 4,523 55,861
Capital expenditures...................... 202,139 16,273 20,059 238,471
Total assets.............................. 6,570,047 1,107,430 570,569 8,248,046
QUARTER ENDED NOVEMBER 22, 1998
Total revenue............................. $ 4,865,728 $ 928,896 $203,454 $ 5,998,078
Operating income (loss)................... 142,919 36,337 (660) 178,596
Depreciation and amortization............. 37,341 6,974 3,447 47,762
Capital expenditures...................... 145,264 29,995 7,307 182,566
Total assets.............................. 5,641,156 946,820 456,501 7,044,477
YEAR ENDED AUGUST 29, 1999
Total revenue............................. $22,404,026 $4,104,662 $947,343 $27,456,031
Operating income (loss)................... 723,375 146,839 (10,087) 860,127
Depreciation and amortization............. 177,661 32,559 14,591 224,811
Capital expenditures...................... 655,924 79,583 52,428 787,935
Total assets.............................. 5,984,537 992,943 527,521 7,505,001
</TABLE>
NOTE (6)--SUBSEQUENT EVENT
On December 9, 1999, the Company announced that it's Board of Directors
approved a 2-for-1 split of its common stock. Shareholders will receive one
additional share of common stock for every share held on the record date of
December 24, 1999. Additional shares will be mailed or delivered on or about
January 13, 2000, by the Company's transfer agent, ChaseMellon Shareholder
Services. The common stock will begin trading at a post-split price on
January 14, 2000.
17
<PAGE>
[LOGO]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-03-2000
<PERIOD-START> AUG-30-1999
<PERIOD-END> NOV-21-1999
<CASH> 550,917
<SECURITIES> 165,086
<RECEIVABLES> 181,163
<ALLOWANCES> 4,274
<INVENTORY> 2,706,103
<CURRENT-ASSETS> 3,867,817
<PP&E> 5,270,355
<DEPRECIATION> 1,167,430
<TOTAL-ASSETS> 8,248,046
<CURRENT-LIABILITIES> 3,426,187
<BONDS> 921,175
0
0
<COMMON> 982,074
<OTHER-SE> 2,720,802
<TOTAL-LIABILITY-AND-EQUITY> 8,248,046
<SALES> 6,824,197
<TOTAL-REVENUES> 6,943,512
<CGS> 6,120,201
<TOTAL-COSTS> 6,728,252
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,397
<INCOME-PRETAX> 215,530
<INCOME-TAX> 86,212
<INCOME-CONTINUING> 129,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129,318
<EPS-BASIC> .58
<EPS-DILUTED> .56
</TABLE>
<PAGE>
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Costco Wholesale Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Costco Wholesale Corporation (a Washington corporation) and subsidiaries as of
November 21, 1999, and the related condensed consolidated statements of income
for the twelve-week periods ended November 21, 1999 and November 22, 1998, 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 6, 1999
18
