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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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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 26, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20355
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COSTCO WHOLESALE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<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:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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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 448,101,851 common shares, par value $.005, outstanding
at December 8, 2000.
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COSTCO WHOLESALE CORPORATION
INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
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PAGE
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ITEM 1 -- FINANCIAL STATEMENTS.............................. 1
Condensed Consolidated Balance Sheets..................... 7
Condensed Consolidated Statements of Income............... 8
Condensed Consolidated Statements of Cash Flows........... 9
Notes to Condensed Consolidated Financial Statements...... 10
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 1
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS................................. 5
ITEM 2 -- CHANGES IN SECURITIES............................. 5
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES................... 5
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 5
ITEM 5 -- OTHER INFORMATION................................. 5
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K.................. 5
Exhibit (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants..... 16
</TABLE>
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Wholesale Corporation's ("Costco" or the "Company") unaudited
condensed consolidated balance sheet as of November 26, 2000, the condensed
consolidated balance sheet as of September 3, 2000, and the unaudited condensed
consolidated statements of income and cash flows for the 12-week periods ended
November 26, 2000 and November 21, 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 2001 is a
52-week year with period 13 ending on September 2, 2001, with the first, second,
and third quarters consisting of 12 weeks each and the fourth quarter consisting
of 16 weeks. Fiscal 2000 was a 53-week year that ended on September 3, 2000,
with the fourth quarter consisting of 17 weeks.
In December 1999, the Company's Board of Directors approved a 2-for-1 stock
split of Costco Common Stock whereby shareholders of record 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 that 2-for-1 stock split.
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 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 2000 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED NOVEMBER 26, 2000 AND NOVEMBER 21, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the first quarter of fiscal 2001 totaled $129,521, or $0.28
per diluted share, as compared to $129,318, or $0.28 per diluted share, during
the first quarter of fiscal 2000.
Net sales increased 10% to $7,498,979 during the first quarter of fiscal
2001, from $6,824,197 during the first quarter of fiscal 2000. This increase was
due to opening a net of 26 new warehouses (33 opened, 7 closed) since the end of
the first quarter of fiscal 2000 and an increase in comparable warehouse sales.
Comparable sales, that is sales in warehouses open for at least a year,
increased 5% during the first quarter of fiscal 2001. Changes in prices of
merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased 16% to $138,299, or 1.84% of
net sales, in the first quarter of fiscal 2001 from $119,315, or 1.75% of net
sales, in the first quarter of fiscal 2000. Membership fees include new
membership sign-ups at the new warehouses opened since the end of the first
quarter of fiscal 2000, and also reflect an increase in the annual membership
fee -- averaging approximately $5 per member across all member
categories -- beginning with renewals on October 1, 2000.
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Gross margin (defined as net sales minus merchandise costs) increased 12%
to $785,335, or 10.47% of net sales, in the first quarter of fiscal 2001 from
$703,996, or 10.32% of net sales, in the first quarter of fiscal 2000. The
increase in gross margin as a percentage of net sales reflects increased sales
penetration of certain higher gross margin merchandise, including private label
items, 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 both fiscal 2001 and 2000 each
included a $2,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
increased to 9.22% during the first quarter of fiscal 2001 from 8.74% during the
first quarter of fiscal 2000. The increase in selling, general and
administrative expenses as a percent of net sales was due to a number of
factors: An increase in the entry level wage rate of hourly employees beginning
in the fourth quarter of fiscal 2000; higher expenses associated with an
increase in new warehouse openings year over year (a net of eleven and six
warehouses opened in the first quarter of fiscal 2001 and 2000, respectively)
where expense ratios to sales are typically higher than at more mature
warehouses; continued expansion and rollout of a new co-branded credit card
program; and an increase in utility costs.
Preopening expenses totaled $19,680, or 0.26% of net sales, during the
first quarter of fiscal 2001 compared to $10,334, or 0.15% of net sales, during
the first quarter of fiscal 2000. Fourteen warehouses were opened, including
three replacement locations, in the first quarter of fiscal 2001 compared to six
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 impaired assets and warehouse closing costs of $1,000 was
recorded in the first quarter of both fiscal 2001 and fiscal 2000. The
provisions include actual and estimated closing costs for warehouses already
relocated or impairment related to warehouses being relocated to new facilities
during the fiscal year.
Interest expense totaled $6,964 in the first quarter of fiscal 2001
compared to $10,397 in the first quarter of fiscal 2000. Interest expense in the
first quarter of fiscal 2001 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 in the first
quarter of fiscal 2001, resulting from the current increased level of expansion
over the prior year's first quarter.
Interest income and other totaled $11,005 in the first quarter of fiscal
2001 compared to $10,667 in the first quarter of fiscal 2000. The increase
primarily reflects improved earnings from Costco Mexico, a 50% owned joint
venture, which was partially offset by lower interest income due to lower cash
and cash equivalents and short-term investment balances on hand throughout the
first quarter of fiscal 2001.
The effective income tax rate on earnings in the first quarter of both
fiscal 2001 and 2000 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 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 $900,000 to $1,100,000 during
fiscal 2001 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $150,000 to $200,000 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, short-term borrowings
under revolving credit facilities and other financing sources as required.
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Expansion plans for the United States and Canada during fiscal 2001 are to
open approximately 34 to 36 new warehouse clubs, including 5 to 6 relocations of
existing warehouses to larger and better-located facilities. The Company expects
to continue expansion of its international operations and plans to open 2 to 3
additional units in the United Kingdom through its 80%-owned subsidiary, two
additional units in Korea through its 95%-owned subsidiary and one additional
unit in Japan through a wholly-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 Costco Mexico. As of November 26, 2000,
Costco Mexico operated 19 warehouses in Mexico and plans to open one additional
warehouse club during the remainder of fiscal 2001.
Bank Credit Facilities and Commercial Paper Programs (all amounts stated in US
dollars)
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 11 banks, of which $250,000
expires on November 14, 2001 and $250,000 expires on November 15, 2005. At
November 26, 2000, no amounts were outstanding under the loan facility or the
commercial paper program.
In addition, a wholly owned Canadian subsidiary has a $130,000 commercial
paper program supported by a $91,000 bank credit facility with three Canadian
banks, which expires in March, 2001. At November 26, 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 $591,000 combined amounts of
the respective supporting bank credit facilities.
Letters of Credit
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $372,000. The outstanding
commitments under these facilities at November 26, 2000 totaled approximately
$151,000, including approximately $29,000 in standby letters of credit.
Financing Activities
The Company's unsecured note payable to banks of $140,000 is due in April
2001. The Company anticipates funding this repayment with cash provided from
operations, the use of cash and cash equivalents and/or short-term borrowings
under revolving credit facilities.
Derivatives
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate and foreign exchange
risks. Forward foreign exchange contracts are used to hedge the impact of
fluctuations of foreign exchange on selected inventory purchases. The amount of
interest rate and foreign exchange contracts outstanding at November 26, 2000
was 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. On August 11, 2000, the swap agreement was amended to
index the floating rate to the three-month LIBOR rate. Subsequent to
quarter-end, the Company terminated the swap agreement, and recorded a gain
which will be amortized over the remaining term of the debt. The termination of
the swap agreement will not have a material impact on the Company's financial
statements.
Financial Position and Cash Flows
Working capital was a deficit of approximately $93,000 at November 26,
2000, compared to working capital of $66,000 at September 3, 2000. The decrease
in net working capital was primarily due to a decrease in net inventory levels
(inventories less accounts payable) of $159,000, increases in accrued salaries
and
3
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benefits and other current liabilities of $103,000 and deferred membership
income of $33,000, which were largely offset by increases in receivables of
$42,000, cash and cash equivalents and short-term investments of $34,000 and
other assets of $25,000; as well as decreases in accrued sales and other taxes
of $25,000 and short-term borrowings of $10,000.
Net cash provided by operating activities in the first quarter of fiscal
2001 totaled $118,070 compared to $240,011 in the first quarter of fiscal 2000.
The decrease in net cash from operating activities is primarily a result of the
increase in the change of net inventory levels (inventories less accounts
payable) in the first quarter of fiscal 2001, as compared to the first quarter
of fiscal 2000.
Net cash used in investing activities totaled $345,235 in the first quarter
of fiscal 2001 compared to $139,040 in the first quarter of fiscal 2000. The
investing activities primarily relate to additions to property and equipment for
new and remodeled warehouses of $380,406 and $238,471 in the first quarter of
fiscal 2001 and 2000, respectively. The Company opened a net of eleven
warehouses (14 opened, 3 closed) during the first quarter of fiscal 2001
compared to six warehouses opened during the first quarter of fiscal 2000. In
addition, the Company plans to open approximately 9 new warehouses in the second
quarter of fiscal 2001 as compared to 6 new warehouses opened in the second
quarter of fiscal 2000. Net cash used in investing activities also reflects a
decrease in short-term investments of $46,932 and $91,874 in the first quarter
of fiscal 2001 and 2000, respectively.
Net cash provided by financing activities totaled $318,004 in the first
quarter of fiscal 2001 compared to $7,246 in the first quarter of fiscal 2000.
This increase is primarily due to the increase in changes in bank overdrafts of
$288,656 and the issuance of long-term debt totaling $32,395 in the first
quarter of fiscal 2001.
The Company's balance sheet as of November 26, 2000 reflects a $883,817 or
10% increase in total assets since September 3, 2000. The increase is primarily
due to a net increase in property and equipment and merchandise inventory
related to the Company's expansion program, as well as, increased seasonal
inventory levels.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative and Hedging Activities", and in June 2000, issued SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
an amendment of SFAS 133. These new standards require companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the fair value
of those derivatives would be accounted for based on the use of the derivative
and whether the instrument qualified for hedge accounting, as defined in SFAS
133 and SFAS 138.
The Company adopted SFAS 133 and SFAS 138 on September 4, 2000, the first
day of fiscal 2001. On that date the Company designated its fixed-to-floating
swap contract as a fair value hedge of its Senior Notes, and recorded the Senior
Notes and the swap contract at fair market value. At November 26, 2000, the net
impact of the changes to the fair market value of the Senior Notes and the swap
contract was not material. The Company's use of derivative instruments during
the quarter ended November 26, 2000, was limited to the fixed-to-floating swap
contract on its 7 1/8% Senior Notes and foreign exchange contracts. The impact
of the adoption on the Company's financial statements was not material.
4
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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 25,
2001 at the Doubletree Hotel, 300 - 112th 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) No reports on Form 8-K were filed for the 12 weeks ended November 26,
2000.
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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
Date: December 20, 2000 /s/ JAMES D. SINEGAL
--------------------------------------
James D. Sinegal
President and Chief Executive Officer
Date: December 20, 2000 /s/ RICHARD A. GALANTI
--------------------------------------
Richard A. Galanti
Executive Vice President,
Chief Financial Officer
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
ASSETS
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<CAPTION>
NOVEMBER 26, SEPTEMBER 3,
2000 2000
------------ ------------
(UNAUDITED)
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CURRENT ASSETS
Cash and cash equivalents................................. $ 606,935 $ 524,505
Short-term investments.................................... -- 48,026
Receivables, net.......................................... 216,694 174,375
Merchandise inventories, net.............................. 2,993,716 2,490,088
Other current assets...................................... 257,560 233,124
----------- -----------
Total current assets.............................. 4,074,905 3,470,118
----------- -----------
PROPERTY AND EQUIPMENT
Land and land rights...................................... 1,671,443 1,621,798
Buildings and leasehold and land improvements............. 3,151,193 3,007,752
Equipment and fixtures.................................... 1,362,332 1,311,110
Construction in progress.................................. 281,609 200,729
----------- -----------
6,466,577 6,141,389
Less-accumulated depreciation and amortization............ (1,356,107) (1,307,273)
----------- -----------
Net property and equipment........................ 5,110,470 4,834,116
----------- -----------
OTHER ASSETS................................................ 332,382 329,706
----------- -----------
$ 9,517,757 $ 8,633,940
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short term borrowings..................................... $ -- $ 9,500
Accounts payable.......................................... 2,859,489 2,197,139
Accrued salaries and benefits............................. 458,665 422,264
Accrued sales and other taxes............................. 134,230 159,717
Deferred membership income................................ 295,642 262,249
Other current liabilities................................. 420,155 353,490
----------- -----------
Total current liabilities......................... 4,168,181 3,404,359
LONG-TERM DEBT.............................................. 823,687 790,053
DEFERRED INCOME TAXES AND OTHER LIABILITIES................. 90,140 90,391
----------- -----------
Total liabilities................................. 5,082,008 4,284,803
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................................... 108,963 108,857
----------- -----------
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; 447,962,000 and 447,297,000 shares issued
and outstanding........................................ 2,240 2,236
Additional paid-in capital................................ 1,041,087 1,028,414
Other accumulated comprehensive loss...................... (172,721) (117,029)
Retained earnings......................................... 3,456,180 3,326,659
----------- -----------
Total stockholders' equity........................ 4,326,786 4,240,280
----------- -----------
$ 9,517,757 $ 8,633,940
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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<CAPTION>
12 WEEKS ENDED
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NOVEMBER 26, NOVEMBER 21,
2000 1999
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REVENUE
Net sales................................................. $7,498,979 $6,824,197
Membership fees and other................................. 138,299 119,315
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Total revenue..................................... 7,637,278 6,943,512
OPERATING EXPENSES
Merchandise costs......................................... 6,713,644 6,120,201
Selling, general and administrative....................... 691,127 596,717
Preopening expenses....................................... 19,680 10,334
Provision for impaired assets and warehouse closing
costs.................................................. 1,000 1,000
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Operating income.................................. 211,827 215,260
OTHER INCOME (EXPENSE)
Interest expense.......................................... (6,964) (10,397)
Interest income and other................................. 11,005 10,667
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INCOME BEFORE INCOME TAXES.................................. 215,868 215,530
Provision for income taxes................................ 86,347 86,212
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NET INCOME.................................................. $ 129,521 $ 129,318
========== ==========
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Basic..................................................... $ 0.29 $ 0.29
========== ==========
Diluted................................................... $ 0.28 $ 0.28
========== ==========
Shares used in calculation (000's)
Basic..................................................... 447,676 443,300
Diluted................................................... 473,920 473,414
</TABLE>
The accompanying notes are an integral part of these financial statements.
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COSTCO WHOLESALE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
12 WEEKS ENDED
----------------------------
NOVEMBER 26, NOVEMBER 21,
2000 1999
------------ ------------
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 129,521 $ 129,318
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 64,703 55,861
Accretion of discount on zero coupon notes............. 3,774 3,718
Tax benefit from exercise of stock options............. 4,725 10,500
Change in receivables, other current assets, accrued
and other current liabilities......................... 50,541 50,359
Increase in merchandise inventories.................... (526,641) (487,573)
Increase in accounts payable........................... 396,017 480,511
Other.................................................. (4,570) (2,683)
--------- ---------
Total adjustments................................. (11,451) 110,693
--------- ---------
Net cash provided by operating activities.............. 118,070 240,011
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment....................... (380,406) (238,471)
Proceeds from the sale of property and equipment.......... 203 12,919
Investment in unconsolidated joint ventures............... (5,000) --
Decrease in short-term investments........................ 46,932 91,874
Increase in other assets and other, net................... (6,964) (5,362)
--------- ---------
Net cash used in investing activities.................. (345,235) (139,040)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments under short-term credit facilities, net........ (9,256) --
Net proceeds from issuance of long-term debt.............. 32,395 253
Repayments of long-term debt.............................. (1,854) (2,752)
Changes in bank overdraft................................. 288,656 (14,146)
Proceeds from minority interests.......................... 111 7,272
Exercise of stock options................................. 7,952 16,619
--------- ---------
Net cash provided by financing activities.............. 318,004 7,246
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (8,409) 2,114
--------- ---------
Net increase in cash and cash equivalents................. 82,430 110,331
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR................. 524,505 440,586
--------- ---------
CASH AND CASH EQUIVALENTS END OF PERIOD..................... $ 606,935 $ 550,917
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized).................. $ -- $ 1,679
Income taxes........................................... $ 30,353 $ 34,546
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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 September 3, 2000.
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 November 26, 2000, Costco operated 324 warehouse clubs: 247 in
the United States; 59 in Canada; 11 in the United Kingdom; three in Korea; three
in Taiwan; and one in Japan. The Company also operated (through a 50%-owned
joint venture) 19 warehouses in Mexico. The Company also operates Costco Online,
an electronic commerce web site, at www.costco.com.
The Company's investment in the Costco 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 31st. Fiscal year 2001 is a 52-week year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending September 2, 2001, consisting of 16 weeks. Fiscal year 2000 was a 53-week
year, with the fourth quarter consisting of 17 weeks.
Cash and 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.
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 $3,309 and $3,368 at November 26, 2000 and September 3,
2000, respectively.
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
10
<PAGE> 13
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)
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 $10,650 at November 26, 2000 and
$8,150 at September 3, 2000. The Company provides for estimated inventory losses
between physical inventory counts on the basis of a standard percentage of
sales. This provision may be 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 November 26, 2000 and September 3, 2000, are $342,907 and $55,002,
respectively, representing the excess of outstanding checks over cash on deposit
at the banks on which the checks were drawn.
Derivatives
The Company has limited involvement with derivative financial instruments
and only uses them 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 selected 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 2001 was 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, which, as
amended, replaces the fixed interest rate with a floating rate indexed to the
three month LIBOR rate. The notional amount of the swap agreement is equal to
the face value of the notes ($300,000). This swap agreement expires in June
2005, coinciding with the maturity date of the Senior Notes. Subsequent to the
end of the first quarter of fiscal 2001, the Company terminated the swap
agreement and recorded a gain, which will be amortized over the remaining term
of the debt. The termination of the swap agreement will not have a material
impact on the Company's financial statements.
Foreign Currency Translations
Assets and liabilities recorded in foreign currencies, as well as the
Company's investment in the Costco Mexico joint venture, are translated at the
exchange rate on the balance sheet date. Translation adjustments resulting from
this process are charged or credited to other comprehensive income. Revenue and
expenses of the Company's consolidated foreign operations are translated at
average rates of exchange prevailing during the year. Gains and losses on
foreign currency transactions are included in expenses.
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.
11
<PAGE> 14
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)
Preopening Expenses
Preopening expenses related to new warehouses, major remodels/expansions,
regional offices and other start-up operations are expensed as incurred.
Warehouse Closing Costs
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. At November 26, 2000, the reserve for
warehouse closing costs was $11,559, primarily representing future lease
obligations.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
That standard requires companies to account for deferred income taxes using the
asset and liability method.
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 26, NOVEMBER 21,
2000 1999
------------ ------------
<S> <C> <C>
Net income available to common stockholders used in basic
EPS...................................................... $129,521 $129,318
Interest on convertible bonds, net of tax.................. 2,264 2,276
-------- --------
Net income available to common stockholders after assumed
conversions of dilutive securities....................... $131,785 $131,594
======== ========
Weighted average number of common shares used in basic EPS
(000's).................................................. 447,676 443,300
Stock options (000's)...................................... 6,899 10,766
Conversion of convertible bonds (000's).................... 19,345 19,348
-------- --------
Weighted number of common shares and dilutive potential
common stock used in diluted EPS (000's)................. 473,920 473,414
======== ========
</TABLE>
All per share data reflects the 2-for-1 stock split which was approved by
the Company's Board of Directors in December 1999, 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
In November 1998, the Company's Board of Directors authorized a stock
repurchase program of up to $500,000 of Costco Common Stock over the next three
years. In early June 2000, the Company repurchased 3.13 million shares of common
stock at an average price of $31.96 per share, totaling approximately $99,946
excluding commissions. 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.
12
<PAGE> 15
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)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative and Hedging Activities", and in June 2000, issued SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
an amendment of SFAS 133. These new standards require companies to record
derivative financial instruments on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the fair value
of those derivatives would be accounted for based on the use of the derivative
and whether the instrument qualified for hedge accounting, as defined in SFAS
133 and SFAS 138.
The Company adopted SFAS 133 and SFAS 138 on September 4, 2000, the first
day of fiscal 2001. On that date the Company designated its fixed-to-floating
swap contract as a fair value hedge of its Senior Notes, and recorded the Senior
Notes and the swap contract at fair market value. At November 26, 2000, the net
impact of changes to the fair market value of the Senior Notes and the swap
contract was not material. The Company's use of derivative instruments during
the quarter ended November 26, 2000, was limited to the fixed-to-floating swap
contract on its 7 1/8% Senior Notes and foreign exchange contracts. The impact
of adoption on the Company's financial statements was not material.
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition", to
provide guidance on the recognition, presentation, and disclosure of revenues in
financial statements. The Company believes that its revenue recognition
practices are in conformity with the guidelines in SAB 101, as revised, and that
this pronouncement will have no impact on its financial statements.
In March 2000, the Financial Accounting Standards Board released FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25," which provides
clarification of APB Opinion No. 25 for certain issues, such as the
determination of who is an employee, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. The Company believes that its practices are in conformity with this
guidance, and that Interpretation No. 44 does not have a material impact on its
financial statements.
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.
13
<PAGE> 16
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
----------------------------
NOVEMBER 26, NOVEMBER 21,
2000 1999
------------ ------------
<S> <C> <C>
Net income................................................. $129,521 $129,318
Other comprehensive income (expense):
Foreign currency translation............................. (55,692) 14,346
Income taxes............................................. 22,277 (5,738)
-------- --------
Other comprehensive income (expense), net of income
taxes................................................. (33,415) 8,608
-------- --------
Comprehensive income....................................... $ 96,106 $137,926
======== ========
</TABLE>
NOTE (3) -- DEBT
Bank Lines of Credit and Commercial Paper Programs
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 11 banks, of which $250,000
expires on November 14, 2001 and $250,000 expires on November 15, 2005. At
November 26, 2000, no amounts were outstanding under the loan facility or the
commercial paper program.
In addition, a wholly owned Canadian subsidiary has a $130,000 commercial
paper program supported by a $91,000 bank credit facility with three Canadian
banks, which expires in March, 2001. At November 26, 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 $591,000 combined amounts of
the respective supporting bank credit facilities.
Letters of Credit
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $372,000. The outstanding
commitments under these facilities at November 26, 2000 totaled approximately
$151,000, including approximately $29,000 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 of operations.
14
<PAGE> 17
COSTCO WHOLESALE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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, 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>
QUARTER ENDED NOVEMBER 26, 2000
Total revenue......................... $ 6,214,262 $1,105,347 $ 317,669 $ 7,637,278
Operating income (loss)............... 170,666 43,286 (2,125) 211,827
Depreciation and amortization......... 51,030 8,311 5,362 64,703
Capital expenditures.................. 338,187 18,716 23,503 380,406
Total assets.......................... 7,742,172 1,101,390 674,195 9,517,757
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
YEAR ENDED SEPTEMBER 3, 2000
Total revenue......................... $26,170,108 $4,743,657 $1,250,531 $32,164,296
Operating income (loss)............... 848,605 192,310 (3,465) 1,037,450
Depreciation and amortization......... 198,436 36,563 19,398 254,397
Capital expenditures.................. 998,429 41,962 188,030 1,228,421
Total assets.......................... 6,833,440 1,134,998 665,502 8,633,940
</TABLE>
15
