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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MAY 7, 2000
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 of (I.R.S.Employer
incorporation or organization) Identification No.)
</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>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock $.005 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 446,982,533 common shares, par value $.005, outstanding
at June 9, 2000.
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COSTCO WHOLESALE CORPORATION
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
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ITEM 1--FINANCIAL STATEMENTS................................ 3
Condensed Consolidated Balance Sheets................... 10
Condensed Consolidated Statements of Operations......... 11
Condensed Consolidated Statements of Cash Flows......... 12
Notes to Condensed Consolidated Financial Statements.... 13
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS................................... 8
ITEM 2--CHANGES IN SECURITIES............................... 8
ITEM 3--DEFAULTS UPON SENIOR SECURITIES..................... 8
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 8
ITEM 5--OTHER INFORMATION................................... 8
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.................... 8
Exhibit (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants... 19
</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 May 7, 2000, and the condensed
consolidated balance sheet as of August 29, 1999, unaudited condensed
consolidated statements of operations and cash flows for the 12- and 36-week
periods ended May 7, 2000 and May 9, 1999 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 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, expansion in new and existing markets, actions of vendors
and other risks identified from time to time in the Company's reports filed with
the Securities and Exchange Commission.
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.
The Company's Board of Directors approved a 2-for-1 stock split of Costco
Common Stock whereby shareholders received one additional share of common stock
for every share held on the record date of December 24, 1999. The common stock
began trading at a post-split price on January 14, 2000, and all per share data
reflects this 2-for-1 stock split.
COMPARISON OF THE 12 WEEKS ENDED MAY 7, 2000 AND MAY 9, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the third quarter of fiscal 2000 increased 14% to $120,329,
or $0.26 per diluted share, from $105,877, or $0.23 per diluted share, during
the third quarter of fiscal 1999.
Net sales increased 14% to $6,768,608 during the third quarter of fiscal
2000, from $5,941,049 during the third quarter of fiscal 1999. This increase was
due to opening a net of 17 new warehouses (23 opened, 6 closed) since the end of
the third 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 10% during the third 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 12% to $126,000 or 1.86% of net
sales in the third quarter of fiscal 2000 from $112,771 or 1.90% of net sales in
the third quarter of fiscal 1999. Membership fees include new membership
sign-ups at the new warehouses opened since the end of the third quarter of
fiscal 1999.
3
<PAGE>
Gross margin (defined as net sales minus merchandise costs) increased 14% to
$684,362 or 10.11% of net sales in the third quarter of fiscal 2000 from
$599,333 or 10.09% of net sales in the third quarter of fiscal 1999. The
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 third quarter of fiscal 2000 includes a
$2,500 LIFO provision compared to a $3,500 LIFO provision in the third quarter
of fiscal 1999.
Selling, general and administrative expenses as a percent of net sales
increased to 8.94% during the third quarter of fiscal 2000 from 8.89% during the
third quarter of fiscal 1999. The increase in selling, general and
administrative expenses as a percent of net sales was due to higher expenses
associated with international expansion; continued expansion and rollout of
certain ancillary businesses; an increase in credit card merchant fees
associated with the rollout of a new co-branded credit card program which was
partially offset by a year-over-year expense improvement (as a percentage of net
sales) at the Company's Central and Regional administrative offices.
Preopening expenses totaled $6,728 or 0.10% of net sales during the third
quarter of fiscal 2000 compared to $6,120 or 0.10% of net sales during the third
quarter of fiscal 1999. Two warehouses were opened in the third quarter of
fiscal 2000 compared to three warehouses opened during last year's third
quarter. Preopening expenses also include costs related to remodels, including
expanded fresh foods and ancillary operations at existing warehouses, as well as
costs associated with expanding international operations.
A provision for warehouse closing costs of $1,500 was recorded in the third
quarter of both fiscal 2000 and fiscal 1999. The provisions include actual and
estimated closing costs for warehouses being relocated to new facilities during
the fiscal year.
Interest expense totaled $9,604 in the third quarter of fiscal 2000 compared
to $10,524 in the third 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 a decrease in the
interest rate related to the 7 1/8% Senior Notes, due to entering into a
"fix-to-floating" interest rate swap agreement on December 10, 1999 that
effectively converted the fixed rate of 7 1/8% to a floating rate indexed to the
thirty day commercial paper rate.
Interest income and other totaled $12,943 in the third quarter of fiscal
2000 compared to $10,659 in the third quarter of fiscal 1999. The increase
primarily reflects higher rates of interest earned on higher balances of cash
and cash equivalents and short-term investments during the third quarter of
fiscal 2000, as compared to the third quarter of fiscal 1999 and improved
earnings from Price Club Mexico, a 50%-owned joint venture.
The effective income tax rate on earnings in the third quarter of both
fiscal 2000 and 1999 was 40%.
COMPARISON OF THE 36 WEEKS ENDED MAY 7, 2000 AND MAY 9, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first thirty-six weeks of fiscal 2000 reflect
net income of $431,255, or $.92 per diluted share, compared to net income of
$244,120, or $.53 per diluted share during the first thirty-six weeks of fiscal
1999. Net income in the first thirty-six weeks of fiscal 1999 included a
$118,023 non-cash, after-tax charge, reflecting the cumulative effect of the
Company's change in accounting for membership fees from a cash to a deferred
method. Before the impact of this non-cash charge, net earnings were $362,143,
or $.78 per diluted share.
Net sales increased 16% to $21,206,406 during the first thirty-six weeks of
fiscal 2000 from $18,319,732 during the first thirty-six weeks of fiscal 1999.
This increase was primarily due to an increase in comparable
4
<PAGE>
warehouse sales and opening a net of 17 warehouses (23 opened, 6 closed) since
the end of the third quarter of fiscal 1999. Comparable sales, that is sales in
warehouses open for at least a year, increased 12 percent during the first
thirty-six weeks of fiscal 2000, reflecting new marketing and merchandising
efforts, including the rollout of fresh foods and various ancillary businesses
to certain existing locations. Changes in prices of merchandise did not
materially contribute to sales increases.
Membership fees and other revenue increased to $368,701 or 1.74% of net
sales in the first thirty-six weeks of fiscal 2000 from $324,524 or 1.77% of net
sales in the first thirty-six weeks of fiscal 1999. Membership fees include new
membership sign-ups at the new warehouses opened since the end of the third
quarter of fiscal 1999.
Gross margin (defined as net sales minus merchandise costs) increased 16% to
$2,209,592 or 10.42% of net sales in the first thirty-six weeks of fiscal 2000
from $1,901,578 or 10.38% of net sales in the first thirty-six weeks of fiscal
1999. The 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 thirty-six weeks of
fiscal 2000 includes a $7,500 LIFO provision compared to a $9,500 LIFO provision
in the first thirty-six weeks of fiscal 1999.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.67% during the first thirty-six weeks of fiscal 2000 from 8.68%
during the first thirty-six weeks 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; the opening of two new regional buying offices and the
increase in credit card merchant fees associated with the rollout of a new
co-branded credit card program.
Preopening expenses totaled $25,170 or 0.12% of net sales during the first
thirty-six weeks of fiscal 2000 compared to $20,778 or 0.11% of net sales during
the first thirty-six weeks of fiscal 1999. Fourteen warehouses were opened in
the first thirty-six weeks of fiscal 2000 (including two relocated warehouses)
compared to twelve new locations during the last year's first thirty-six weeks
(including two relocated warehouses). 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 and the opening of two new regional offices.
In the first thirty-six weeks of fiscal 2000, the Company recorded a
provision for warehouse closing costs of $4,000 compared to $6,500 in the first
thirty-six weeks of fiscal 1999. The provisions included closing costs for
warehouses closed in each respective fiscal year, including exit costs
associated with warehouses which were or are being relocated to new facilities.
There were two relocations in the first thirty-six weeks of fiscal 2000 and
fiscal 1999.
Interest expense totaled $30,577 in the first thirty-six weeks of fiscal
2000 compared to $32,431 in the first thirty-six weeks 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 relating to construction projects and a
decrease in the interest rate related to the 7 1/8% Senior Notes, due to
entering into a "fix-to-floating" interest rate swap agreement on December 10,
1999 that effectively converted the fixed rate of 7 1/8% to a floating rate
indexed to the thirty day commercial paper rate.
Interest income and other totaled $38,593 in the first thirty-six weeks of
fiscal 2000 compared to $27,890 in the first thirty-six weeks of fiscal 1999.
The increase primarily reflects higher interest rates earned on higher balances
of cash and cash equivalents and short-term investments during the first
5
<PAGE>
thirty-six weeks of fiscal 2000, as compared to the year-earlier first
thirty-six weeks and improved earnings from Price Club Mexico, a 50%-owned joint
venture.
The effective income tax rate on earnings in the first thirty-six weeks of
fiscal 2000 and 1999 was 40%.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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,
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 $668,340 at
May 7, 2000), 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 three to five
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
80%-owned subsidiary and an additional unit in Taiwan through its 55%-owned
subsidiary during the year. Through the end of the first thirty-six weeks of
fiscal 2000, the Company opened 14 new warehouses (including two relocations).
Expansion plans for the remainder of fiscal 2000 include 11 to 13 new openings
in the U.S. and Canada (including two to three relocations) and two warehouses
in the United Kingdom. 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 May 7, 2000, Price
Club Mexico operated 17 warehouses in Mexico and plans to open one new warehouse
club during the remainder of fiscal 2000.
ACQUISITION OF MINORITY INTEREST
On May 26, 2000, the Company acquired from The Littlewoods Organisation PLC
its 20% equity interest in Costco Wholesale UK Limited, bringing the Company's
ownership in Costco Wholesale UK Limited to 80%. The acquisition was funded with
cash and cash equivalents on hand. Costco Wholesale UK Limited currently
operates eight Costco warehouse locations--six in England and two in Scotland.
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 11 banks, which expires in
January, 2001. At May 7, 2000 no amounts were outstanding under the loan
facility or the commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $134,000 commercial
paper program supported by a $94,000 bank credit facility with three Canadian
banks, which expires in March 2001. At May 7, 2000 no amounts were outstanding
under the bank credit facility or the Canadian commercial paper program.
6
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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 $282,000. The outstanding
commitments under these facilities at May 7, 2000 totaled approximately
$163,000, including approximately $26,000 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 thirty-six 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.
YEAR 2000
The Company implemented an extensive project to ensure that its systems were
Year 2000 compliant and fully operational prior to the year 2000 and on into the
21(st) Century. Virtually all systems--including information technology systems
and non-information technology equipment--have worked properly in the year 2000.
In addition, the Company has not experienced any material year 2000-related
problems with its significant suppliers with which its systems interface or
exchange data. The total costs related to the Year 2000 efforts were
approximately $7,500--in line with prior estimates and were fully expensed as
incurred during the relevant fiscal periods.
FINANCIAL POSITION AND CASH FLOWS
Working capital totaled approximately $485,000 at May 7, 2000 compared to
$450,000 at August 29, 1999. Working capital was positively affected by an
increase in net inventory levels (inventories less accounts payable) of $62,000,
a decrease in accrued salaries and benefits, sales and other taxes and other
current liabilities of $25,000 and an increase in other current assets of
$6,000, which increases were largely offset by a decrease in cash and cash
equivalents and short-term investments of $29,000, an increase in deferred
membership income of $26,000 (the result of accounting for membership fees on a
deferred basis), and a decrease in receivables of $3,000.
Net cash provided by operating activities totaled $580,947 in the first
thirty-six weeks of fiscal 2000 and $643,503 in the first thirty-six weeks of
fiscal 1999. The year-over-year decrease in net cash from operating activities
is primarily a result of increased net income (adjusted for the non-cash
cumulative effect of an accounting change in fiscal 1999) during the first
thirty-six weeks of fiscal 2000 compared to the first thirty-six weeks of fiscal
1999, which was more than offset by a reduction in the change in net
receivables, other current assets, accrued and other current liabilities and
accounts payable.
Net cash used in investing activities totaled $607,398 in the first
thirty-six weeks of fiscal 2000 compared to $680,982 in the first thirty-six
weeks of fiscal 1999. The investing activities primarily relate to additions to
property and equipment for new and remodeled warehouses of $737,917 and $529,081
in the first thirty-six weeks of fiscal 2000 and 1999, respectively. The Company
opened 14 warehouses (including two relocations) in the first thirty-six weeks
of fiscal 2000 and has plans to open 13 to 15 new warehouses (including two to
three relocations) during the remainder of the fiscal year compared to 21 new
7
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warehouses (including seven relocations) opened during fiscal 1999. Net cash
used in investing activities also reflects a decrease in short-term investments
of $115,236 since the beginning of fiscal year 2000 compared to an increase of
$176,154 in the first thirty-six weeks of fiscal 1999.
Net cash provided by financing activities totaled $113,819 in the first
thirty-six weeks of fiscal 2000 compared to $78,344 in the first thirty-six
weeks of fiscal 1999. This increase is primarily attributable to the exercise of
stock options.
The Company's balance sheet as of May 7, 2000 reflects a $693,264 or 9.2%
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.
STOCK REPURCHASE PROGRAM
On November 5, 1998, the Company announced that its Board of Directors had
authorized a stock repurchase program of up to $500,000 of Costco Common Stock
over the next three years. The Company expects to repurchase shares from time to
time in the open market or in private transactions as market conditions warrant.
The Company expects to fund stock purchases from cash and short-term investments
on hand and from operating cash flows. Subsequent to the end of its third
quarter, the Company repurchased 3.13 million shares through June 9, 2000 at an
average price of $31.96 per share totaling approximately $100,024.
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(27) Financial Data Schedule
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended May 7, 2000.
8
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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.
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COSTCO WHOLESALE CORPORATION
REGISTRANT
Date: June 9, 2000 /s/ JAMES D. SINEGAL
---------------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: June 9, 2000 /s/ RICHARD A. GALANTI
---------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
</TABLE>
9
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
MAY 7, AUGUST 29,
2000 1999
----------- -----------
(UNAUDITED)
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ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 527,232 $ 440,586
Short-term investments.................................... 141,108 256,688
Receivables, net.......................................... 165,955 168,648
Merchandise inventories, net.............................. 2,367,481 2,210,475
Other current assets...................................... 245,247 239,516
----------- -----------
Total current assets.................................... 3,447,023 3,315,913
----------- -----------
PROPERTY AND EQUIPMENT
Land and land rights...................................... 1,480,855 1,264,125
Buildings and leasehold improvements...................... 2,743,733 2,444,640
Equipment and fixtures.................................... 1,258,460 1,138,568
Construction in progress.................................. 219,882 176,824
----------- -----------
5,702,930 5,024,157
Less-accumulated depreciation and amortization............ (1,258,359) (1,117,269)
----------- -----------
Net property and equipment.............................. 4,444,571 3,906,888
----------- -----------
OTHER ASSETS................................................ 306,671 282,200
----------- -----------
$ 8,198,265 $ 7,505,001
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 2,007,167 $ 1,912,632
Accrued salaries and benefits............................. 381,588 414,276
Accrued sales and other taxes............................. 136,628 122,932
Deferred membership income................................ 251,698 225,903
Other current liabilities................................. 184,542 190,490
----------- -----------
Total current liabilities............................... 2,961,623 2,866,233
LONG-TERM DEBT.............................................. 925,335 918,888
DEFERRED INCOME TAXES AND OTHER LIABILITIES................. 69,764 66,990
----------- -----------
Total liabilities....................................... 3,956,722 3,852,111
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................................... 133,884 120,780
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock $.005 par value; 200,000,000 shares
authorized; no shares issued and outstanding............ -- --
Common stock $.005 par value; 1,800,000,000 shares
authorized; 449,937,000 and 442,736,000 shares issued
and outstanding......................................... 2,250 2,214
Additional paid-in capital................................ 1,095,314 952,758
Other accumulated comprehensive loss...................... (116,382) (118,084)
Retained earnings......................................... 3,126,477 2,695,222
----------- -----------
Total stockholders' equity.............................. 4,107,659 3,532,110
----------- -----------
$ 8,198,265 $ 7,505,001
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets
10
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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 36 WEEKS ENDED
----------------------- -------------------------
MAY 7, MAY 9, MAY 7, MAY 9,
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE
Net sales....................................... $6,768,608 $5,941,049 $21,206,406 $18,319,732
Membership fees and other....................... 126,000 112,771 368,701 324,524
---------- ---------- ----------- -----------
Total revenue................................. 6,894,608 6,053,820 21,575,107 18,644,256
OPERATING EXPENSES
Merchandise costs............................... 6,084,246 5,341,716 18,996,814 16,418,154
Selling, general and administrative............. 604,924 528,158 1,838,380 1,590,713
Preopening expenses............................. 6,728 6,120 25,170 20,778
Provision for impaired assets and warehouse
closing costs................................. 1,500 1,500 4,000 6,500
---------- ---------- ----------- -----------
Operating income.............................. 197,210 176,326 710,743 608,111
OTHER INCOME (EXPENSE)
Interest expense................................ (9,604) (10,524) (30,577) (32,431)
Interest income and other....................... 12,943 10,659 38,593 27,890
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE.......................... 200,549 176,461 718,759 603,570
Provision for income taxes...................... 80,220 70,584 287,504 241,427
---------- ---------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE........................................ 120,329 105,877 431,255 362,143
Cumulative effect of accounting change, net of
tax........................................... -- -- -- (118,023)
---------- ---------- ----------- -----------
NET INCOME...................................... $ 120,329 $ 105,877 $ 431,255 $ 244,120
========== ========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic earnings per share:
Income before cumulative effect of
accounting change......................... $ .27 $ .24 $ .97 $ .83
Cumulative effect of accounting change, net
of tax.................................... -- -- -- (.27)
---------- ---------- ----------- -----------
Net Income.................................. $ .27 $ .24 $ .97 $ .56
========== ========== =========== ===========
Diluted earnings per share:
Income before cumulative effect of
accounting change......................... $ .26 $ .23 $ .92 $ .78
Cumulative effect of accounting change, net
of tax.................................... -- -- -- (.25)
---------- ---------- ----------- -----------
Net Income.................................. $ .26 $ .23 $ .92 $ .53
========== ========== =========== ===========
Shares used in calculation (000's)
Basic....................................... 448,113 440,438 445,557 437,968
Diluted..................................... 478,750 473,570 476,409 470,362
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 WEEKS ENDED
---------------------
MAY 7, MAY 9,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 431,255 $ 244,120
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 172,507 150,722
Accretion of discount on zero coupon notes.............. 11,087 11,255
Cumulative effect of accounting change, net of tax...... -- 118,023
Change in receivables, other current assets, accrued and
other current liabilities............................. 55,929 148,793
Increase in merchandise inventories..................... (157,539) (172,718)
Increase in accounts payable............................ 79,147 156,401
Other................................................... (11,439) (13,093)
--------- ---------
Total adjustments..................................... 149,692 399,383
--------- ---------
Net cash provided by operating activities............... 580,947 643,503
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment....................... (737,917) (529,081)
Proceeds from the sale of property and equipment.......... 45,237 48,393
Change in short-term investments.......................... 115,236 (176,154)
Investment in unconsolidated joint venture................ -- (15,000)
Other..................................................... (29,954) (9,140)
--------- ---------
Net cash used in investing activities................... (607,398) (680,982)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from long-term borrowings.................... 253 3,461
Repayments of long-term debt.............................. (7,631) (7,932)
Change in bank checks outstanding......................... 17,745 24,281
Proceeds from minority interests.......................... 11,289 9,430
Exercise of stock options................................. 92,163 49,104
--------- ---------
Net cash provided by financing activities............... 113,819 78,344
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (722) 5,911
--------- ---------
Net increase in cash and cash equivalents................. 86,646 46,776
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 440,586 361,974
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 527,232 $ 408,750
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)................... $ 16,287 $ 15,860
Income taxes............................................ $ 209,362 $ 178,794
</TABLE>
The accompanying notes are an integral part of these financial statements
12
<PAGE>
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 have been eliminated in consolidation. Costco Wholesale Corporation
and its wholly-owned subsidiary, The Price Company, 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 May 7, 2000, Costco operated 305 warehouse clubs: 231 in the
United States; 59 in Canada; 8 in the United Kingdom; three in Korea; three in
Taiwan; and one in Japan. As of May 7, 2000, 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.
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)
SHORT-TERM INVESTMENTS
At May 7, 2000 and August 29, 1999 short term investments consisted of the
following:
<TABLE>
<CAPTION>
MAY 7, 2000 AUGUST 29, 1999
------------ ----------------
<S> <C> <C>
Municipal securities............................... $ 6,453 $ 97,966
Corporate notes and bonds.......................... 97,451 89,872
U.S. Treasury/Agency securities.................... 2,340 43,699
Certificates of deposit............................ 33,490 24,841
Foreign Bonds...................................... 1,312 --
Other.............................................. 62 310
-------- --------
Total short-term investments..................... $141,108 $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 May 7, 2000 or August 29, 1999. Realized gains and losses are
included in interest income and were not significant in the first thirty-six
weeks 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 $3,257 and $4,582 at May 7, 2000 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 $18,650 at
May 7, 2000 and $11,150 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
at May 7, 2000 and August 29, 1999 are $38,722 and $21,081, respectively,
representing the excess of outstanding checks over cash on deposit at the banks
on which the checks were drawn.
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)
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 $.25
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, second and third quarters of fiscal
2000, the Company recorded additional charges of $1,000, $1,500, and $1,500
respectively, in net warehouse closing costs. At May 7, 2000 the reserve for
warehouse closing costs was $19,076, 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 36 WEEKS ENDED
--------------------------- ---------------------------
MAY 7, 2000 MAY 9, 1999 MAY 7, 2000 MAY 9, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income available to common stockholders used
in basic EPS.................................. $120,329 $105,877 $431,255 $244,120
Interest on convertible bonds, net of tax....... 2,230 2,202 6,691 6,753
-------- -------- -------- --------
Net income available to common stockholders
after assumed conversions of dilutive
securities.................................... $122,559 $108,079 $437,946 $250,873
======== ======== ======== ========
Weighted average number of common shares used in
basic EPS (000's)............................. 448,113 440,438 445,557 437,968
Stock options (000's)........................... 11,290 13,238 11,504 12,138
Conversion of convertible bonds (000's)......... 19,347 19,894 19,348 20,256
-------- -------- -------- --------
Weighted number of common shares and dilutive
potential common stock used in diluted
EPS (000's)................................... 478,750 473,570 476,409 470,362
======== ======== ======== ========
</TABLE>
15
<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)
All per share data reflects the 2-for-1 stock split which was approved by
the Company's Board of Directors for shareholders of record on December 24,
1999. The common stock began trading at the post-split price on January 14,
2000.
STOCK REPURCHASE PROGRAM
On November 5, 1998, the Company announced that its Board of Directors had
authorized a stock repurchase program of up to $500,000 of Costco Common Stock
over the next three years. The Company expects to repurchase shares from time to
time in the open market or in private transactions as market conditions warrant.
The Company expects to fund stock purchases from cash and short-term investments
on hand and from operating cash flows. Subsequent to the end of its third
quarter, the Company repurchased 3.13 million shares through June 9, 2000 at an
average price of $31.96 per share totaling approximately $100,024.
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 thirty-six 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 has
limited use of derivative financial instruments and believes that SFAS No. 133
would not have a material impact on its results of operations or its 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.
16
<PAGE>
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2)--COMPREHENSIVE INCOME
Consolidated comprehensive income is as follows:
<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
--------------------------- ---------------------------
MAY 7, 2000 MAY 9, 1999 MAY 7, 2000 MAY 9, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income...................................... $120,329 $105,877 $431,255 $244,120
Other comprehensive income (expense):
Foreign currency translation.................. (30,174) 13,180 1,702 46,376
Income tax expense............................ 12,070 (5,272) (681) (18,550)
-------- -------- -------- --------
Other comprehensive income(loss), net of
income taxes.............................. (18,104) 7,908 1,021 27,826
-------- -------- -------- --------
Comprehensive income............................ $102,225 $113,785 $432,276 $271,946
======== ======== ======== ========
</TABLE>
NOTE (3)--DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has in place a $425,000 commercial paper program supported by a
$425,000 bank credit facility with a group of 11 banks, which expires in
January, 2001. At May 7, 2000 no amounts were outstanding under the loan
facility or the commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $134,000 commercial
paper program supported by a $94,000 bank credit facility with three Canadian
banks, which expires in March 2001. At May 7, 2000 no amounts were outstanding
under the bank credit facility or the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $519,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit) totaling approximately $282,000. The outstanding
commitments under these facilities at May 7, 2000 totaled approximately
$163,000, including approximately $26,000 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 or 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, and Japan; through
majority-owned subsidiaries in the United Kingdom,
17
<PAGE>
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (5)--SEGMENT REPORTING (CONTINUED)
Taiwan 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>
THIRTY-SIX WEEKS ENDED MAY 7, 2000
Total revenue............................. $17,537,965 $3,175,255 $861,887 $21,575,107
Operating income (loss)................... 586,260 127,377 (2,894) 710,743
Depreciation and amortization............. 134,408 25,374 12,725 172,507
Capital expenditures...................... 603,705 32,756 101,456 737,917
Total assets.............................. 6,516,636 1,071,909 609,720 8,198,265
THIRTY-SIX WEEKS ENDED MAY 9, 1999
Total revenue............................. $15,242,203 $2,767,677 $634,376 $18,644,256
Operating income (loss)................... 513,573 99,981 (5,443) 608,111
Depreciation and amortization............. 118,090 22,428 10,204 150,722
Capital expenditures...................... 434,931 65,629 28,521 529,081
Total assets.............................. 5,602,543 1,007,875 507,352 7,117,770
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 May 26, 2000, the Company acquired from The Littlewoods Organisation PLC
its 20% equity interest in Costco Wholesale UK Limited, bringing the Company's
ownership in Costco Wholesale UK Limited to 80%. The acquisition was funded with
cash and cash equivalents on hand. Costco Wholesale UK Limited currently
operates eight Costco warehouse locations--six in England and two in Scotland.
18
<PAGE>
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