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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 29, 1999
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)
WASHINGTON 91-1223280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
999 LAKE DRIVE, ISSAQUAH, WA 98027
(Address of principal executive offices)
(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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock $.01 Par Value The Nasdaq National Market
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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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant at October 29, 1999 was $17,587,421,145.
The number of shares outstanding of the registrant's common stock as of
October 29, 1999 was 221,834,643.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 27, 2000 are incorporated by reference into
Part III of this Form 10-K.
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COSTCO WHOLESALE CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 29, 1999
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
Item 4A. Executive Officers of the Registrant........................ 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 10
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Item 8. Financial Statements........................................ 18
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 18
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 19
Item 11. Executive Compensation...................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 19
Item 13. Certain Relationships and Related Transactions.............. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K............................................... 19
2
PART I
ITEM 1--BUSINESS
Costco Wholesale Corporation ("Costco" or the "Company") began operations in
1983 in Seattle, Washington. In October 1993, Costco merged with The Price
Company, which had pioneered the membership warehouse concept in 1976, to form
Price/Costco, Inc., a Delaware corporation. In January 1997, after the spin-off
of most of its non-warehouse assets to Price Enterprises, Inc., the Company
changed its name to Costco Companies, Inc. On August 30, 1999, the Company
reincorporated from Delaware to Washington and changed its name to Costco
Wholesale Corporation, which trades on the NASDAQ under the symbol "COST".
GENERAL
Costco operates membership warehouses based on the concept that offering
members very low prices on a limited selection of nationally branded and
selected private label products in a wide range of merchandise categories will
produce high sales volumes and rapid inventory turnover. This rapid inventory
turnover, when combined with the operating efficiencies achieved by volume
purchasing, efficient distribution and reduced handling of merchandise in
no-frills, self-service warehouse facilities, enables Costco to operate
profitably at significantly lower gross margins than traditional wholesalers,
discount retailers and supermarkets.
Costco buys nearly all of its merchandise directly from manufacturers for
shipment either directly to Costco's selling warehouses or to a consolidation
point ("depot") where various shipments are combined so as to minimize freight
and handling costs. As a result, Costco eliminates many of the costs associated
with multiple step distribution channels, which include purchasing from
distributors as opposed to manufacturers, use of central receiving, storing and
distributing warehouses, and storage of merchandise in locations off the sales
floor. By providing this more cost-effective means of distributing goods, Costco
meets the needs of business customers who otherwise would pay a premium for
small purchases and for the distribution services of traditional wholesalers,
and who cannot otherwise obtain the full range of their product requirements
from any single source. In addition, these business members will often combine
personal shopping with their business purchases. Individuals shopping for their
personal needs are primarily motivated by the cost savings on brand name and
selected private label merchandise. Costco's merchandise selection is designed
to appeal to both the business and consumer requirements of its members by
offering a wide range of nationally branded and selected private label products,
often in case, carton or multiple-pack quantities, at attractively low prices.
Because of its high sales volume and rapid inventory turnover, Costco
generally has the opportunity to receive cash from the sale of a substantial
portion of its inventory at mature warehouse operations before it is required to
pay all its merchandise vendors, even though Costco takes advantage of early
payment terms to obtain payment discounts. As sales in a given warehouse
increase and inventory turnover becomes more rapid, a greater percentage of the
inventory is financed through payment terms provided by vendors rather than by
working capital.
Costco's typical warehouse format averages approximately 132,000 square
feet. Floor plans are designed for economy and efficiency in the use of selling
space, in the handling of merchandise and in the control of inventory. Because
shoppers are attracted principally by the availability of low prices on brand
name and selected private label goods, Costco's warehouses need not be located
on prime commercial real estate sites or have elaborate facilities.
By strictly controlling the entrances and exits of its warehouses and by
limiting membership to selected groups and businesses, Costco has been able to
limit inventory losses to less than three-tenths of one percent of net
sales--well below those of typical discount retail operations. Losses associated
with
3
ITEM 1--BUSINESS (CONTINUED)
dishonored checks have also been minimal, since individual memberships are
generally limited to members of qualifying groups, and bank information from
business members is verified prior to establishing a check purchase limit.
Memberships are invalidated at the point of sale for those members who have
issued dishonored checks to Costco.
Costco's policy is generally to limit advertising and promotional expenses
to new warehouse openings and occasional direct mail advertisements to
prospective new members. These practices result in lower marketing expenses as
compared to typical discount retailers and supermarkets. In connection with new
warehouse openings, Costco's marketing teams personally contact businesses in
the area who are potential wholesale members. These contacts are supported by
direct mailings during the period immediately prior to opening. Potential Gold
Star (individual) members are contacted by direct mail or by providing such
mailings to be distributed through credit unions, employee associations and
other entities representing individuals who are eligible for Gold Star
membership. After a membership base is established in an area, most new
memberships result from word-of-mouth advertising, follow-up contact by direct
mail distributed through regular payroll or other organizational communications
to employee groups, and ongoing direct solicitations to prospective wholesale
members.
Costco's warehouses generally operate on a seven-day, 68-hour week, and are
open somewhat longer during the holiday season. Generally, warehouses are open
weekdays between 10:00 a.m. and 8:30 p.m., with earlier closing hours on the
weekend. Because these hours of operation are shorter than those of traditional
discount grocery retailers and supermarkets, labor costs are lower relative to
the volume of sales. Merchandise is generally stored on racks above the sales
floor and displayed on pallets containing large quantities of each item, thereby
reducing labor required for handling and stocking. In addition, sales are
processed through centralized, automated check-out stands. Most items are not
individually price marked; rather, each item is bar-coded so it can be scanned
into electronic cash registers. This allows price changes without remarking
merchandise. Substantially all manufacturers provide merchandise pre-marked with
the item numbers and bar codes and many provide special, larger package sizes.
Costco's merchandising strategy is to provide the customer with a broad
range of high quality merchandise at prices consistently lower than could be
obtained through traditional wholesalers, discount retailers or supermarkets. An
important element of this strategy is to carry only those products on which
Costco can provide its members significant cost savings. Items which members may
request but which cannot be purchased at prices low enough to pass along
meaningful cost savings are usually not carried. Costco seeks to limit specific
items in each product line to fast selling models, sizes and colors and
therefore carries only an average of approximately 3,600 to 4,400 active
stockkeeping units ("SKU's") per warehouse in its core warehouse business, as
opposed to discount retailers and supermarkets which normally stock 40,000 to
60,000 SKU's or more. These practices are consistent with Costco's membership
policies of satisfying both the business and personal shopping needs of its
wholesale members, thereby encouraging high volume shopping. Many consumable
products are offered for sale in case, carton or multiple-pack quantities only.
Appliances, equipment and tools often feature commercial and professional
models. Costco's policy is to accept returns of merchandise within a reasonable
time after purchase.
4
ITEM 1--BUSINESS (CONTINUED)
The following table indicates the approximate percentage of net sales
accounted for by each major category of items sold by Costco during fiscal 1999,
1998, and 1997:
1999 1998 1997
-------- -------- --------
SUNDRIES (including candy, snack foods, health and beauty
aids, tobacco, alcoholic beverages, soft drinks and
cleaning and institutional supplies)...................... 30% 30% 31%
FOOD (including dry and fresh foods and institutionally
packaged foods)........................................... 31% 32% 32%
HARDLINES (including major appliances, video and audio tape,
electronics, tools, office supplies, furniture and
automotive supplies)...................................... 20% 20% 20%
SOFTLINES (including apparel, domestics, cameras, jewelry,
housewares, books and small appliances)................... 12% 12% 12%
OTHER (including pharmacy, optical, one-hour photo, print
shop, hearing aid and gas stations)....................... 7% 6% 5%
--- --- ---
100% 100% 100%
=== === ===
Costco has direct buying relationships with many producers of national brand
name merchandise. No significant portion of merchandise is obtained by Costco
from any one of these or any other single supplier. Costco has not experienced
any difficulty in obtaining sufficient quantities of merchandise, and believes
that if one or more of its current sources of supply became unavailable, it
would be able to obtain alternative sources without experiencing a substantial
disruption of its business. Costco also purchases different national brand name
or selected private label merchandise of the same product, as long as cost,
quality and customer demand are comparable.
Costco reports on a 52/53 week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. The first, second
and third quarters consist of three periods each, and the fourth quarter
consists of four periods (five weeks in the thirteenth period in a 53-week
year). There is no material seasonal impact on Costco's operations, except an
increased level of sales and earnings during the Christmas holiday season.
MEMBERSHIP POLICY
Costco's membership format is designed to reinforce customer loyalty and
provide a continuing source of membership fee revenue. Costco has two primary
types of members: Business and Gold Star (individual) members. In addition, the
Company offers an Executive Membership program to both Business and Gold Star
members.
Businesses, including individuals with a business license, retail sales
license or other evidence of business existence, may become Business members.
Costco promotes Business membership through its merchandise selection and its
membership marketing programs. Business members generally pay an annual
membership fee of $35 for the primary membership card with additional membership
cards available for an annual fee of $25.
Individual memberships are available to employees of federal, state and
local governments, financial institutions, corporations, utility and
transportation companies, public and private educational institutions, and other
selected organizations. Individual members generally pay an annual membership
fee of $40, which includes a spouse card.
Executive Memberships are available to any Business or Gold Star member for
a total annual fee of $100. This membership offers Business and Gold Star
members the opportunity to save on various services such as merchant credit card
processing, auto and homeowner insurance, employee health insurance, real
5
ITEM 1--BUSINESS (CONTINUED)
estate and mortgage services, long-distance telephone services and small
business loans. The services offered are generally provided by third-party
service providers and vary by state.
As of August 29, 1999, Costco had approximately 3.9 million Business
memberships and approximately 9.6 million Gold Star memberships. Members can
utilize their memberships at any warehouse location.
LABOR
As of August 29, 1999, Costco had approximately 70,000 employees, including
about 50% who were part-time. Approximately 11,000 hourly employees in
California, Maryland, New Jersey, New York and one warehouse in Virginia are
represented by the International Brotherhood of Teamsters. In addition, one
warehouse in the Canadian province of British Columbia is represented by the
Retail Wholesale Union. All remaining hourly employees are non-union. Costco
considers its employee relations to be good.
COMPETITION
The Company operates in the rapidly changing and highly competitive
merchandising industry. When The Price Company pioneered the membership
warehouse club concept in 1976, the dominant companies selling comparable lines
of merchandise were department stores, grocery stores and traditional
wholesalers. Since then, new merchandising concepts and aggressive marketing
techniques have led to a more intense and focused competitive environment.
Wal-Mart has become the largest retailer in the United States (and the world)
and has expanded into food merchandising. Target has also emerged as a
significant retail competitor. Approximately 846 warehouse clubs exist across
the U.S. and Canada, including the 279 warehouses operated by the Company in
North America; and every major metropolitan area has some, if not several, club
operations. Low cost operators selling a single category or narrow range of
merchandise, such as Home Depot, Office Depot, PetSmart, Toys-R-Us, Circuit City
and Barnes & Noble, have significant market share in their respective
categories. New forms of retailing involving modern technology are boosting
sales in certain stores, while home shopping and electronic commerce over the
Internet is becoming increasingly popular. Likewise, in the institutional food
business, companies such as Smart & Final, which operates in Arizona, California
and Florida, are capturing an increasingly greater share of the institutional
food business from wholesale operators and others; and many supermarkets now
offer food lines in bulk sizes and at prices comparable to those offered by the
Company. (See "Item--7 Management's Discussion and Analysis of Financial
Condition and Results of Operations".)
REGULATION
Certain state laws require that the Company apply minimum markups to its
selling prices for specific goods, such as tobacco products and alcoholic
beverages. While compliance with such laws may cause the Company to charge
somewhat higher prices than it otherwise would charge, other retailers are also
typically governed by the same restrictions, and the Company believes that
compliance with such laws does not have a material adverse effect on its
operations.
It is the policy of the Company to sell at lower than manufacturers'
suggested retail prices. Some manufacturers attempt to maintain the resale price
of their products by refusing to sell to the Company or to other purchasers that
do not adhere to suggested retail prices. To date, the Company believes that it
has not been materially affected by its inability to purchase directly from such
manufacturers. Both federal and state legislation is proposed from time to time
which, if enacted, would restrict the Company's ability to purchase goods or
extend the application of laws enabling the establishment of minimum prices. The
Company cannot predict the effect on its business of the enactment of such
federal or state legislation.
6
ITEM 1--BUSINESS (CONTINUED)
Certain states, counties and municipalities have enacted or proposed laws
and regulations that would prevent or restrict the operations or expansion plans
of certain large retailers, including the Company, within their jurisdictions.
The Company does not believe such laws and regulations would have a material
adverse effect on its operations.
ITEM 2--PROPERTIES
WAREHOUSE PROPERTIES
At August 29, 1999, Costco operated 292 warehouse clubs: 221 in the United
States (in 27 states); 58 in Canada (in 9 Canadian provinces); seven in the
United Kingdom; three in Korea, two in Taiwan, and one in Japan--primarily under
the "Costco Wholesale" name. The following is a summary of owned and leased
warehouses by region:
NUMBER OF WAREHOUSES
OWN LAND AND LEASE LAND AND/OR
BUILDING BUILDING TOTAL
------------ ----------------- --------
UNITED STATES............................................ 171 50 221
CANADA................................................... 50 8 58
UNITED KINGDOM........................................... 7 -- 7
KOREA.................................................... -- 3 3
TAIWAN................................................... -- 2 2
JAPAN.................................................... -- 1 1
--- -- ---
Total.................................................. 228 64 292
=== == ===
The following schedule shows warehouse openings (net of warehouse closings)
by region for the past five fiscal years and expected openings (net of closings)
through December 31, 1999:
OTHER TOTAL WAREHOUSES
OPENINGS BY FISCAL YEAR UNITED STATES CANADA INTERNATIONAL TOTAL IN OPERATION
- ----------------------- ------------- -------- ------------- -------- ----------------
1994 and prior.......................... 182 37 2 221 221
1995.................................... 9 8 2 19 240
1996.................................... 1 10 1 12 252
1997.................................... 8 (1) 2 9 261
1998.................................... 11 2 4 17 278
1999.................................... 10 2 2 14 292
2000 (through 12/31/99)................. 9 1 0 10 302
--- -- -- ---
Total................................. 230 59 13(a) 302
=== == == ===
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(a) As of August 29, 1999, the Company operated (through a 50%-owned joint
venture) 16 warehouses in Mexico (one opened in fiscal 1992, two opened in
fiscal 1993, five opened in fiscal 1994, five opened in fiscal 1995, one
opened in fiscal 1998, and two opened in fiscal 1999). An additional
warehouse was opened in Cancun in September 1999, bringing the total as of
12/31/99 to 17 warehouses. These warehouses are not included in the number
of warehouses open in any period because the joint venture is accounted for
on the equity basis and therefore their operations are not consolidated in
the Company's financial statements.
7
ITEM 2--PROPERTIES (CONTINUED)
The Company's headquarters are located in Issaquah, Washington.
Additionally, the Company maintains regional buying and administrative offices,
operates regional cross-docking facilities (depots) for the consolidation and
distribution of certain shipments to the warehouses and operates various
processing, packaging and other facilities to support ancillary and other
businesses.
ITEM 3--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 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting is scheduled for 10:00 a.m. on January 27,
2000, at the Doubletree Hotel in Bellevue, Washington. Matters to be voted on
will be included in the Company's proxy statement to be filed with the
Securities and Exchange Commission and distributed to stockholders prior to the
meeting.
ITEM 4A--EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the names, ages and positions of the executive
officers of the registrant.
NAME AGE POSITION WITH COMPANY
- --------------------- -------- ------------------------------------------------------------
James D. Sinegal 63 President and Chief Executive Officer
Jeffrey H. Brotman 57 Chairman of the Board
Richard D. DiCerchio 56 Sr. Executive Vice President, Chief Operating
Officer--Merchandising, Distribution and Construction
Richard A. Galanti 43 Executive Vice President and Chief Financial Officer
Franz E. Lazarus 52 Executive Vice President--International Operations
David B. Loge 57 Executive Vice President--Manufacturing and Ancillary
Businesses
W. Craig Jelinek 47 Executive Vice President, Chief Operating Officer--Northern
Division
Edward B. Maron 72 Executive Vice President, Chief Operating Officer--Canadian
Division
Paul G. Moulton 48 Executive Vice President--Marketing, E-commerce, Member
Services and Community Giving
Joseph P. Portera 46 Executive Vice President, Chief Operating Officer--Eastern
Division
Dennis R. Zook 50 Executive Vice President, Chief Operating Officer--Southern
Division
James D. Sinegal has been President, Chief Executive Officer and a director
of the Company since October 1993 upon consummation of the merger of Costco
Wholesale Corporation and The Price Company (the "Merger"). From its inception
in 1983 until 1993, he was President and Chief Operating Officer of Costco
Wholesale Corporation and served as Chief Executive Officer from August 1988
until October 1993. Mr. Sinegal was a co-founder of Costco Wholesale Corporation
and has been a director since its inception.
Jeffrey H. Brotman is a native of the Pacific Northwest and is a 1967
graduate of the University of Washington Law School. Mr. Brotman was a
co-founder and Chairman of the Board of Costco Wholesale Corporation from its
inception. Upon the consummation of the Merger, Mr. Brotman became the
Vice-Chairman of the Company, and has served as Chairman since December 1994.
Mr. Brotman is a founder of a number of other specialty retail chains.
8
ITEM 4A--EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Richard D. DiCerchio was named Senior Executive Vice President of the
Company in 1997. He is currently Executive Vice President and Chief Operating
Officer--Merchandising, Distribution and Construction and a director of the
Company since October 1993. Until mid-August 1994, he also served as Executive
Vice President, Chief Operating Officer--Northern Division. He was appointed
Chief Operating Officer--Western Region of Costco Wholesale Corporation in
August 1992 and was appointed Executive Vice President and director of Costco
Wholesale Corporation in April 1986. From June 1985 to April 1986, he was Senior
Vice President, Merchandising of Costco Wholesale Corporation. He joined Costco
Wholesale Corporation as Vice President, Operations in May 1983.
Richard A. Galanti has been Executive Vice President and Chief Financial
Officer of the Company since the Merger and has been a director of the Company
since January 1995. He was Senior Vice President, Chief Financial Officer and
Treasurer of Costco Wholesale Corporation from January 1985 until the Merger,
having joined Costco Wholesale Corporation as Vice President--Finance in
March 1984. From 1978 to February 1984, Mr. Galanti was an Associate with
Donaldson, Lufkin & Jenrette Securities Corporation.
Franz E. Lazarus was named Executive Vice President--International
Operations in September 1995, prior to which he had served as Executive Vice
President, Chief Operating Officer--Northern Division of the Company since
August 1994 and Executive Vice President, Chief Operating Officer--Eastern
Division since the Merger. He was named Executive Vice President, Chief
Operating Officer--East Coast Operations of Costco Wholesale Corporation in
August 1992. Mr. Lazarus joined Costco Wholesale Corporation in November 1983
and has held various management positions prior to his current position.
David B. Loge has been Executive Vice President--Manufacturing and Ancillary
Businesses since August 1994. Mr. Loge joined The Price Company as a Director of
Price Club Industries in March 1989 and became a Vice President of The Price
Company and President of Price Club Industries in December 1990. Prior to
joining The Price Company, he served as Vice President of Operations of Sundale
Beverage in Belmont, California.
W. Craig Jelinek has been Executive Vice President, Chief Operating
Officer--Northern Division since September 1995. He had been Senior Vice
President, Operations--Northwest Region since September 1992. From May 1986 to
September 1994 he was Vice President, Regional Operations Manager--Los Angeles
Region and has held various management positions since joining Costco Wholesale
Corporation in April 1984.
Edward B. Maron has been Executive Vice President, Chief Operating
Officer--Canadian Division of the Company since the Merger. He had been Senior
Vice President--Canadian Division of Costco Wholesale Corporation since
April 1990. He has held various management positions since joining Costco
Wholesale Corporation in June 1984.
Paul G. Moulton was named Executive Vice President in October 1999 and has
been responsible for Marketing, E-commerce, Member Services and Community Giving
since August 1999. He was Senior Vice President, Information Systems from
November 1997 to August 1999. From 1995 to 1997 he was Senior Vice President,
COO of Costco Asia; and from 1992 to 1995 he was Senior Vice President, COO of
Costco Europe. From 1990 to 1992 Mr. Moulton was Vice President of Finance and
Corporate Treasurer and has held various management positions since joining
Costco Wholesale Corporation in 1985.
Joseph P. Portera has been Executive Vice President, Chief Operating
Officer--Eastern Division of the Company since August 1994. He was Senior Vice
President, Operations--Northern California Region from October 1993 to
August 1994. From August 1991 to October 1993 he was Senior Vice President,
Merchandising--Non Foods of Costco Wholesale Corporation, and has held various
management positions since joining Costco Wholesale Corporation in April 1984.
Dennis R. Zook has been Executive Vice President, Chief Operating
Officer--Southern Division of the Company since the Merger. He was Executive
Vice President of The Price Company since February 1989. Mr. Zook became Vice
President of West Coast Operations of The Price Company in October 1988 and has
held various management positions since joining The Price Company in
October 1981.
9
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading in Costco Common Stock commenced on October 22, 1993, as
Price/Costco, Inc., quoted on The Nasdaq Stock Market's National Market under
the symbol "PCCW". Since January 29, 1997, following a name change to Costco
Companies, Inc. (and a subsequent re-incorporation and name change to Costco
Wholesale Corporation in August 1999), the stock has been quoted on The Nasdaq
Stock Market's National Market under the symbol "COST."
The following table sets forth the closing high and low sales prices of
Costco Common Stock for the period January 1, 1997 through October 29, 1999. The
quotations are as reported in published financial sources.
COSTCO COMMON
STOCK
-----------------------------
HIGH LOW
------------ -----------
Calendar Quarters--1997
First Quarter.......................................... 30 24 1/8
Second Quarter......................................... 35 3/16 26 7/8
Third Quarter.......................................... 39 1/8 31 7/16
Fourth Quarter......................................... 44 15/16 35 1/8
Calendar Quarters--1998
First Quarter.......................................... 58 3/16 42 1/8
Second Quarter......................................... 63 7/32 51 3/8
Third Quarter.......................................... 65 45 1/16
Fourth Quarter......................................... 74 7/8 44 5/16
Calendar Quarters--1999
First Quarter.......................................... 91 13/16 71 1/4
Second Quarter......................................... 92 1/2 71 1/8
Third Quarter.......................................... 86 9/16 66 1/8
Fourth Quarter (through October 29, 1999).............. 83 15/16 72
On October 29, 1999, the Company had 7,575 stockholders of record.
DIVIDEND POLICY
Costco does not pay regular dividends and presently has no plans to declare
a cash dividend. Under its two revolving credit agreements, Costco is generally
permitted to pay dividends in any fiscal year up to an amount equal to 50% of
its consolidated net income for that fiscal year.
ITEM 6--SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth selected financial and operating data for
Costco for the ten fiscal years in the period ended August 29, 1999, giving
effect to the merger of Costco Wholesale Corporation and The Price Company using
the pooling-of-interests method of accounting and treating the non-club real
estate segment as a discontinued operation prior to its spin-off in 1994. This
selected financial and operating data should be read in conjunction with "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements of Costco for fiscal
1999.
10
COSTCO WHOLESALE CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 29, AUGUST 30, AUGUST 31, SEPTEMBER 1, SEPTEMBER 3, AUGUST 28,
1999 1998 1997 1996 1995 1994
----------- ----------- ----------- ------------- ------------- -----------
OPERATING DATA
Revenue
Net sales....................... $26,976,453 $23,830,380 $21,484,118 $19,213,866 $17,905,926 $16,160,911
Membership fees and other....... 479,578 439,497 390,286 352,590 341,360 319,732
----------- ----------- ----------- ----------- ----------- -----------
Total revenue................... 27,456,031 24,269,877 21,874,404 19,566,456 18,247,286 16,480,643
Operating expenses
Merchandise costs............... 24,170,199 21,379,691 19,314,485 17,345,315 16,225,848 14,662,891
Selling, general &
administrative................ 2,338,198 2,069,900 1,876,759 1,691,187 1,555,588 1,425,549
Preopening expenses............. 31,007 27,010 27,448 29,231 25,018 24,564
Provision for impaired assets
and warehouse closing costs... 56,500 6,000 75,000(a) 10,000 7,500 7,500
----------- ----------- ----------- ----------- ----------- -----------
Operating income................ 860,127 787,276 580,712 490,723 433,332 360,139
Other income (expense)
Interest expense................ (45,527) (47,535) (76,281) (78,078) (67,911) (50,472)
Interest income and other....... 44,266 26,662 15,898 10,832 2,783 13,888
Provision for merger and
restructuring expenses........ -- -- -- -- -- (120,000)
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
before income taxes and
cumulative effect of accounting
change.......................... 858,866 766,403 520,329 423,477 368,204 203,555
Provision for income taxes........ 343,545 306,561 208,132 174,684 150,963 92,657
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
before cumulative effect of
accounting change............... 515,321 459,842 312,197 248,793 217,241 110,898
Cumulative effect of accounting
change, net of tax............ (118,023)(b) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations...................... 397,298 459,842 312,197 248,793 217,241 110,898
Discontinued operations:
Income (loss), net of tax....... -- -- -- -- -- (40,766)
Loss on disposal................ -- -- -- -- (83,363) (182,500)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 397,298 $ 459,842 $ 312,197 $ 248,793 $ 133,878 $ (112,368)
=========== =========== =========== =========== =========== ===========
Per Share Data--Diluted
Income from continuing
operations before cumulative
effect of accounting change... $ 2.23 $ 2.03 $ 1.47 $ 1.22 $ 1.05 $ 0.51
Cumulative effect of accounting
change, net of tax............ (0.50) -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Income from continuing
operations.................... 1.73 2.03 1.47 1.22 1.05 0.51
Discontinued Operations:
Income (loss), net of tax....... -- -- -- -- -- (0.19)
Loss on Disposal................ -- -- -- -- (0.37) (0.83)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 1.73 $ 2.03 $ 1.47 $ 1.22 $ 0.68 $ (0.51)
=========== =========== =========== =========== =========== ===========
Shares used in calculation...... 235,560 231,685 224,668 217,890 223,610 219,332
52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED
AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2,
1993 1992 1991 1990
----------- ----------- ------------- -------------
OPERATING DATA
Revenue
Net sales....................... $15,154,685 $13,820,380 $11,813,509 $9,346,099
Membership fees and other....... 309,129 276,998 228,742 185,144
----------- ----------- ----------- ----------
Total revenue................... 15,463,814 14,097,378 12,042,251 9,531,243
Operating expenses
Merchandise costs............... 13,751,153 12,565,463 10,755,823 8,518,951
Selling, general &
administrative................ 1,314,660 1,128,898 934,120 719,446
Preopening expenses............. 28,172 25,595 16,289 11,691
Provision for impaired assets
and warehouse closing costs... 5,000 2,000 1,850 6,000
----------- ----------- ----------- ----------
Operating income................ 364,829 375,422 334,169 275,155
Other income (expense)
Interest expense................ (46,116) (35,525) (26,041) (18,769)
Interest income and other....... 17,750 28,958 33,913 19,239
Provision for merger and
restructuring expenses........ -- -- -- --
----------- ----------- ----------- ----------
Income from continuing operations
before income taxes and
cumulative effect of accounting
change.......................... 336,463 368,855 342,041 275,625
Provision for income taxes........ 133,620 145,833 134,748 107,899
----------- ----------- ----------- ----------
Income from continuing operations
before cumulative effect of
accounting change............... 202,843 223,022 207,293 167,726
Cumulative effect of accounting
change, net of tax............ -- -- -- --
----------- ----------- ----------- ----------
Income from continuing
operations...................... 202,843 223,022 207,293 167,726
Discontinued operations:
Income (loss), net of tax....... 20,404 19,385 11,566 6,854
Loss on disposal................ -- -- -- --
----------- ----------- ----------- ----------
Net income (loss)............... $ 223,247 $ 242,407 $ 218,859 $ 174,580
=========== =========== =========== ==========
Per Share Data--Diluted
Income from continuing
operations before cumulative
effect of accounting change... $ 0.92 $ 0.98 $ 0.93 $ 0.79
Cumulative effect of accounting
change, net of tax............ -- -- -- --
----------- ----------- ----------- ----------
Income from continuing
operations.................... 0.92 0.98 0.93 0.79
Discontinued Operations:
Income (loss), net of tax....... 0.08 0.08 0.05 0.03
Loss on Disposal................ -- -- -- --
----------- ----------- ----------- ----------
Net income (loss)............... $ 1.00 $ 1.06 $ 0.98 $ 0.82
=========== =========== =========== ==========
Shares used in calculation...... 240,162 245,090 234,202 219,532
- ----------------------------------
(a) Includes the effect of adopting SFAS 121, a $65,000 pre-tax ($38,675
after-tax or $0.17 per diluted share) provision for asset impairment.
(b) Represents a one-time non-cash charge reflecting the cumulative effect of
the Company's change in accounting for membership fees from a cash to a
deferred method.
11
COSTCO WHOLESALE CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT WAREHOUSE DATA)
AUGUST 29, AUGUST 30, AUGUST 31, SEPTEMBER 1, SEPTEMBER 3, AUGUST 28,
1999 1998 1997 1996 1995 1994
----------- ----------- ----------- ------------- ------------- -----------
BALANCE SHEET DATA
Working capital (deficit)...... $ 449,680 $ 431,288 $ 145,903 $ 56,710 $ 9,381 $ (113,009)
Property and equipment, net.... 3,906,888 3,395,372 3,154,634 2,888,310 2,535,593 2,146,396
Total assets................... 7,505,001 6,259,820 5,476,314 4,911,861 4,437,419 4,235,659
Short-term debt................ -- -- 25,460 59,928 75,725 149,340
Long-term debt and capital
lease obligations, net....... 918,888 930,035 917,001 1,229,221 1,094,615 795,492
Stockholders' equity........... $3,532,110 $2,965,886 $2,468,116 $1,777,798 $1,530,744 $1,684,960
WAREHOUSES IN OPERATION
Beginning of year.............. 278 261 252 240 221 200
Opened(a)...................... 21 18(c) 17 20 24 29
Closed(b)...................... (7) (1) (8) (8) (5) (8)
---------- ---------- ---------- ---------- ---------- ----------
End of Year.................... 292 278 261 252 240 221
========== ========== ========== ========== ========== ==========
AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2,
1993 1992 1991 1990
----------- ----------- ------------- -------------
BALANCE SHEET DATA
Working capital (deficit)...... $ 127,312 $ 281,592 $ 304,703 $ 14,342
Property and equipment, net.... 1,966,601 1,704,052 1,183,432 935,767
Total assets................... 3,930,799 3,576,543 2,986,094 2,029,931
Short-term debt................ 23,093 -- -- 139,414
Long-term debt and capital
lease obligations, net....... 812,576 813,976 500,440 199,506
Stockholders' equity........... $1,796,728 $1,593,943 $1,429,703 $ 988,458
WAREHOUSES IN OPERATION
Beginning of year.............. 170 140 119 104
Opened(a)...................... 37 31 23 19
Closed(b)...................... (7) (1) (2) (4)
---------- ---------- ---------- ----------
End of Year.................... 200 170 140 119
========== ========== ========== ==========
- --------------------------
(a) Includes relocations as well as new warehouse openings.
(b) Includes relocations as well as outright closings
(c) Includes the acquisition of two warehouses in Korea formerly operated under
a license agreement.
12
ITEM 7--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, ownership or use
of real estate, actions of vendors, Year 2000 issues, and other risks identified
from time to time in the Company's public statements and reports filed with the
SEC.
COMPARISON OF FISCAL 1999 (52 WEEKS) AND FISCAL 1998 (52 WEEKS):
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net income for fiscal 1999 was impacted by both a $50,000 fourth quarter
pre-tax provision for impaired assets and warehouse closing costs, as well as
the one-time $118,023 non-cash, after-tax charge recorded in the first quarter
of fiscal 1999, reflecting the cumulative effect of the Company's change in
accounting for membership fees from a cash to a deferred method. The impact of
these two charges resulted in net income for fiscal 1999 of $397,298, or $1.73
per diluted share compared to last year's reported net income of $459,842, or
$2.03 per diluted share. Excluding the impact of these two charges, net income
in fiscal 1999 would have been $545,321, or $2.36 per diluted share. Assuming
the newly adopted accounting treatment for deferring membership fees had been in
effect in fiscal 1998, net income for fiscal 1998 would have been $444,451, or
$1.96 per diluted share; and the year-over-year earnings per share increase,
adjusted for these items, would have been 20%.
Net sales increased 13% to $26,976,453 in fiscal 1999 from $23,830,380 in
fiscal 1998. This increase was due to: (i) higher sales at existing locations
opened prior to fiscal 1998; (ii) increased sales at 16 warehouses that were
opened in fiscal 1998 and in operation for the entire 1999 fiscal year; and
(iii) first year sales at the 14 new warehouses opened (21 opened, 7 closed)
during fiscal 1999. Changes in prices did not materially impact sales levels.
Comparable sales, that is sales in warehouses open for at least a year,
increased at a 10% annual rate in fiscal 1999 compared to an 8% annual rate
during fiscal 1998.
Membership fees and other revenue increased 9% to $479,578, or 1.78% of net
sales, in fiscal 1999 from $439,497, or 1.84% of net sales, in fiscal 1998. This
increase is primarily due to membership sign-ups at the 14 new warehouses opened
in fiscal 1999 and a five dollar increase in the annual membership fee for both
Business and Gold Star members effective April 1, 1998 in the United States and
May 1, 1998 in Canada.
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. If the deferred method had been used in fiscal
1998, membership fees and other would have been reduced by $25,651 to $413,846,
or 1.74% of net sales, and the year-over-year increase would have been 16%.
Gross margin (defined as net sales minus merchandise costs) increased 15% to
$2,806,254, or 10.40% of net sales, in fiscal 1999 from $2,450,689, or 10.28% of
net sales, in fiscal 1998. Gross margin as a percentage of net sales increased
due to increased sales penetration of certain higher gross margin ancillary
businesses, favorable inventory shrink results, and improved performance of the
Company's international operations. The gross margin figures reflect accounting
for most U.S. merchandise inventories on the last-in, first-out (LIFO) method.
In fiscal 1999 there was a $4 million LIFO credit, due
13
primarily to deflation in most of the Company's LIFO pools, particularly in the
electronics LIFO pool, coupled with a reduction of tobacco inventory levels
resulting primarily from announced manufacturers' price increases just prior to
fiscal year end. In fiscal 1998 there was no LIFO charge due to the use of the
LIFO method compared to the first-in, first-out (FIFO) method.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.67% during fiscal 1999 from 8.69% during fiscal 1998, primarily
reflecting the increase in comparable warehouse sales noted above, and a
year-over-year improvement in the Company's core warehouse operations and
Central and Regional administrative offices, which were partially offset by
higher expenses associated with international expansion and certain ancillary
businesses.
Preopening expenses totaled $31,007, or 0.11% of net sales, during fiscal
1999 and $27,010, or 0.11% of net sales, during fiscal 1998. During fiscal 1999,
the Company opened 21 new warehouses compared to 16 new warehouses during fiscal
1998. Pre-opening expenses also include costs related to remodels, expanded
fresh foods and ancillary operations at existing warehouses.
The provision for impaired assets and warehouse closing costs was $56,500 in
fiscal 1999 compared to $6,000 in fiscal 1998. The fiscal 1999 provision
includes a charge of $31,080 for the impairment of long-lived assets as required
by the Financial Accounting Standards Board Statement No. 121 (SFAS 121) and
$30,865 for warehouse and other facility closing costs, which were offset by
$5,445 of gains on the sale of real property. The provision for warehouse
closing costs includes $24,773 for lease obligations and $6,092 for other
expenses directly related to the closedown of warehouses and other facilities.
As of August 29, 1999, the Company had expended $828 for lease obligations and
$3,339 for other closedown expenses. The increase in warehouse closing costs is
primarily attributable to the Company's decision in the fourth quarter of fiscal
1999 to relocate several warehouses (which were not otherwise impaired) to
larger and better-located facilities.
Interest expense totaled $45,527 in fiscal 1999, and $47,535 in fiscal 1998.
The decrease in interest expense is primarily due to an increase in capitalized
interest related to construction projects.
Interest income and other totaled $44,266 in fiscal 1999 compared to $26,662
in fiscal 1998. The increase was primarily due to interest earned on higher
balances of cash and cash equivalents and short-term investments during fiscal
1999 as compared to fiscal 1998.
The effective income tax rate on earnings was 40% in both fiscal 1999 and
fiscal 1998.
COMPARISON OF FISCAL 1998 (52 WEEKS) AND FISCAL 1997 (52 WEEKS):
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net operating results for fiscal 1998 reflect net income of $459,842, or
$2.03 per share (diluted), as compared to a fiscal 1997 net income of $312,197,
or $1.47 per share (diluted). The net income for fiscal 1997 includes a
non-cash, pre-tax charge of $65,000 ($38,675 after-tax, or $.17 per share)
reflecting a provision for the impairment of long-lived assets as required by
SFAS 121. In addition, fiscal 1997 net income was impacted by one-time, pre-tax
charges of approximately $13,000 ($7,800 after-tax, or $.03 per share) related
to the call and redemption of $764,000 of convertible subordinated debentures.
Net sales increased 11% to $23,830,380 in fiscal 1998 from $21,484,118 in
fiscal 1997. This increase was due to: (i) higher sales at existing locations
opened prior to fiscal 1997; (ii) increased sales at 17 warehouses that were
opened in fiscal 1997 and in operation for the entire 1998 fiscal year; and
(iii) first year sales at the 16 new warehouses opened during fiscal 1998, which
increase was partially offset by one warehouse closed during fiscal 1998 that
was in operation during fiscal 1997. Changes in prices did not materially impact
sales levels.
14
Comparable sales, that is sales in warehouses open for at least a year,
increased at an 8% annual rate in fiscal 1998, compared to a 9% annual rate
during fiscal 1997. Comparable sales in fiscal 1998 were negatively impacted by
approximately 1% due to a decline in the Canadian exchange rate.
Membership fees and other revenue increased 13% to $439,497, or 1.84% of net
sales, in fiscal 1998 from $390,286, or 1.82% of net sales, in fiscal 1997. This
increase is primarily due to membership sign-ups at the 18 new warehouses opened
in fiscal 1998 and a five dollar increase in the annual membership fee for both
Business and Gold Star members effective April 1, 1998 in the United States and
May 1, 1998 in Canada.
Gross margin (defined as net sales minus merchandise costs) increased 13% to
$2,450,689, or 10.28% of net sales, in fiscal 1998 from $2,169,633, or 10.10% of
net sales, in fiscal 1997. Gross margin as a percentage of net sales increased
due to increased sales penetration of certain higher gross margin ancillary
businesses, the expanded use of the Company's depot facilities, and improved
performance of the Company's international operations. The gross margin figures
reflect accounting for most U.S. merchandise inventories on the last-in,
first-out (LIFO) method. For both fiscal 1998 and 1997 there was no LIFO charge
due to the use of the LIFO method compared to the first-in, first-out (FIFO)
method.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.69% during fiscal 1998 from 8.74% during fiscal 1997, primarily
reflecting the increase in comparable warehouse sales noted above, and a
year-over-year improvement in the Company's core warehouse operations and
Central and Regional administrative offices, which were partially offset by
higher expenses associated with international expansion and certain ancillary
businesses.
Preopening expenses totaled $27,010, or 0.11% of net sales, during fiscal
1998 and $27,448, or 0.13% of net sales, during fiscal 1997. During fiscal 1998,
the Company opened 16 new warehouses (in addition, two warehouses were acquired
during fiscal 1998 as part of the formation of the Korean joint venture)
compared to 17 new warehouses during fiscal 1997.
The provision for impaired assets and warehouse closing costs was $6,000 in
fiscal 1998 compared to $75,000 in fiscal 1997. The fiscal 1997 provision
includes a $65,000 impairment charge relating to the adoption of SFAS 121 and
$10,000 for warehouse closing costs. The provision for warehouse closing costs
includes estimated closing costs for certain warehouses, which had been or were
in the process of being replaced by new warehouses.
Interest expense totaled $47,535 in fiscal 1998, and $76,281 in fiscal 1997.
The decrease in interest expense is primarily related to the call for redemption
during fiscal 1997 of three convertible subordinated debenture issues. Both the
Company's 6 3/4% ($285,100 principal amount), and 5 1/2% ($179,300 principal
amount) debentures were called for redemption in the second quarter of fiscal
1997. Approximately $302,000 of these two series of debentures was converted
into common stock. The 5 3/4% ($300,000 principal amount) debentures were called
for redemption in the fourth quarter of fiscal 1997. The reduction in interest
expense related to the three redemptions was partially offset by the one-time
costs of the redemption call premiums and write-offs of unamortized issuance
costs associated with the redemptions of these convertible subordinated
debentures. Also, in the fourth quarter of fiscal 1997, the Company issued
$900,000 (principal amount at maturity) of Zero Coupon Convertible Subordinated
Notes, priced with a yield to maturity of 3 1/2%, resulting in gross proceeds to
the Company of $449,640, approximately $312,000 of which was used to redeem the
5 3/4% convertible subordinated debentures referred to above.
Interest income and other totaled $26,662 in fiscal 1998, and $15,898 in
fiscal 1997. The increase was primarily due to interest earned on higher
balances of cash and cash equivalents and short-term investments during fiscal
1998 as compared to fiscal 1997.
The effective income tax rate on earnings was 40% in both fiscal 1998 and
fiscal 1997.
15
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 $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 $697,274 at
August 29, 1999), short-term borrowings under revolving credit facilities and
other financing sources as required.
Expansion plans for the United States and Canada during fiscal 2000 are to
open approximately 20 to 25 new warehouse clubs, including four to six
relocations of existing warehouses to larger and better-located warehouses. The
Company expects to continue expansion of its international operations and plans
to open two to three additional units in the United Kingdom through its
60%-owned subsidiary and an additional unit in Taiwan through its 55%-owned
subsidiary during the next year. Other international markets are being assessed.
Costco and its Mexico-based joint venture partner, Controladora Comercial
Mexicana, each own a 50% interest in Price Club Mexico. As of August 29, 1999,
Price Club Mexico operated 16 warehouses in Mexico and plans to open two or
three new warehouse clubs during fiscal 2000, including one that opened in
September 1999.
BANK CREDIT FACILITIES AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN US
DOLLARS)
The Company has in place a $425,000 commercial paper program supported by a
$425,000 bank credit facility with a group of nine banks, of which $175,000
expires on January 24, 2000, and $250,000 expires on January 30, 2001. At
August 29, 1999, 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, of which $57,000 expires in March 2000, and $37,000 expires in
March 2001. At August 29, 1999, no amounts were outstanding under the bank
credit facility or the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $519,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $294,200. The outstanding
commitments under these facilities at August 29, 1999 totaled approximately
$176,500, including approximately $45,300 in standby letters of credit.
16
DERIVATIVES
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate and foreign exchange
risks. Forward foreign exchange contracts are used to hedge the impact of
fluctuations of foreign exchange on inventory purchases. The amount of interest
rate and foreign exchange contracts outstanding at August 29, 1999 were not
material to the Company's results of operations or its financial position.
YEAR 2000
The Company uses a number of computer software programs and embedded
operating systems that were not originally designed to process dates beyond the
year 1999. Like most automated companies, Costco has been addressing the Year
2000 challenge to make sure all of its systems are Year 2000 compliant and fully
operational prior to the year 2000 and on into the 21(st) Century. As far back
as the early 1990's, the Company began taking initial measures to ensure that
its systems would function in the year 2000 and beyond, and in 1997 began a
formal review of each of its applications to determine the Year 2000 compliance
of its date-sensitive systems and equipment. This included assessments of both
information technology, such as point-of-sale computer systems and financial
software applications, as well as non-information technology equipment,
including critical facilities systems, such as security systems, energy
management, warehouse refrigeration, etc.
As of August 29, 1999 the Company has substantially completed the necessary
remediation and testing of virtually all key systems, and believes that the Year
2000 issues will not present any significant operational problems. Total costs
related to the Year 2000 effort are estimated to be less than $7,500, of which
the Company has incurred approximately 90% through August 29, 1999. While it is
possible that the remaining systems currently being implemented, reviewed and/or
tested may produce an unexpected cost increase, the Company does not believe it
would add materially to the current estimated cost.
Additionally, Costco has contacted and will continue to contact significant
vendors, suppliers, financial institutions and other third party providers upon
which its business depends. These efforts are designed to minimize the impact to
the Company should these third parties fail to remediate their Year 2000 issues.
Although the Company has not received responses from all of its suppliers, the
responses received have indicated that they are or will be Year 2000 compliant
and that they are anticipating no significant problems related to Year 2000
preparedness. However, the Company can give no assurances that such third
parties will in fact be successful in resolving all of their Year 2000 issues,
and the failure of such third parties to comply on a timely basis could have an
adverse effect on the Company. The Company anticipates minimal business
disruption as a result of Year 2000 issues; however, possible consequences
include, but are not limited to, loss of local or regional electric power,
delays in delivery or receipt of merchandise, inability to process transactions,
loss of communications, and similar interruptions of normal business activities.
Where needed, the Company has established contingency plans based on assessment
of its supplier base and evaluation of outside risks.
FINANCIAL POSITION AND CASH FLOWS
Working capital totaled approximately $450,000 at August 29, 1999, compared
to working capital of $431,000 at August 30, 1998. The increase in net working
capital was primarily due to an increase in cash and cash equivalents and
short-term investments of approximately $260,000, and an increase in other
current assets of approximately $131,000. These increases were largely offset by
increases in accrued and other current liabilities of approximately $136,000 and
an increase of $226,000 due to the adoption of the deferred membership
accounting method.
Net cash provided by operating activities totaled $940,863 in fiscal 1999
compared to $737,610 in fiscal 1998. The increase in net cash from operating
activities is primarily a result of increased net income,
17
adjusted for the non-cash cumulative effect of accounting change, and a positive
change in net receivables, other current assets and accrued and other current
liabilities.
Net cash used in investing activities totaled $953,923 in fiscal 1999
compared to $609,446 in fiscal 1998. The investing activities primarily relate
to additions to property and equipment for new and remodeled warehouses of
$787,935 and $571,904 in fiscal 1999 and 1998, respectively. The Company opened
21 warehouses during fiscal 1999 compared to 16 warehouses opened during fiscal
1998. Net cash used in investing activities also reflects an increase in
short-term investments of $181,103 since the beginning of fiscal year 1999.
Net cash provided by financing activities totaled $85,845 in fiscal 1999
compared to $66,591 in fiscal 1998. This increase is primarily due to a decline
in net repayments under short-term credit facilities
The Company's balance sheet as of August 29, 1999 reflects a $1,245,181 or
20% increase in total assets since August 30, 1998. The increase is primarily
due to a net increase in property and equipment and merchandise inventory
related to the Company's expansion program and an increase in cash and cash
equivalents and short-term investments.
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 million 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, as well as from future operating cash flows. The
repurchased shares would constitute authorized, but unissued shares and would be
used for general corporate purposes including stock option grants under stock
option programs. As of August 29, 1999, the Company had not repurchased any
stock under the program.
ITEM 8--FINANCIAL STATEMENTS
Financial statements of Costco are as follows:
PAGE
--------
Report of Independent Public Accountants.................... 22
Consolidated Balance Sheets, as of August 29, 1999 and
August 30, 1998........................................... 23
Consolidated Statements of Income, for the 52 weeks ended
August 29, 1999, August 30, 1998 and August 31, 1997...... 24
Consolidated Statements of Stockholders' Equity, for the 52
weeks ended August 29, 1999, August 30, 1998 and
August 31, 1997........................................... 25
Consolidated Statements of Cash Flows, for the 52 weeks
ended August 29, 1999, August 30, 1998 and August 31,
1997...................................................... 26
Notes to Consolidated Financial Statements.................. 27
ITEM 9--CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
18
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the Registrant,
see Item--4A "Executive Officers of the Registrant" at the end of Part I of this
report. The information required by this Item concerning the Directors and
nominees for Director of the Company is incorporated herein by reference to
Costco's Proxy Statement for its Annual Meeting of Stockholders, to be held on
January 27, 2000, to be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year.
ITEM 11--EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
Costco's Proxy Statement for its Annual Meeting of Stockholders, to be held on
January 27, 2000, to be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
Costco's Proxy Statement for its Annual Meeting of Stockholders to be held on
January 27, 2000 to be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
Costco's Proxy Statement for its Annual Meeting of Stockholders, to be held on
January 27, 2000 to be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report are as follows:
1. Financial Statements:
See listing of Financial Statements included as a part of this
Form 10-K on Item 8 of Part II.
2. Financial Statement Schedules--None.
3. Exhibits:
The required exhibits are included at the end of the Form 10-K Annual
Report and are described in the Exhibit Index immediately preceding
the first exhibit.
(b) Current report on form 8-K filed on August 30, 1999.
19
SIGNATURES
Pursuant to the requirements of Section 13 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.
November 22, 1999
COSTCO WHOLESALE CORPORATION
(Registrant)
By /s/ RICHARD A. GALANTI
------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ JAMES D. SINEGAL November 22, 1999
-------------------------------------------
James D. Sinegal
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
By /s/ JEFFREY H. BROTMAN November 22, 1999
-------------------------------------------
Jeffrey H. Brotman
CHAIRMAN OF THE BOARD
By /s/ RICHARD D. DICERCHIO November 22, 1999
-------------------------------------------
Richard D. DiCerchio
SR. EXECUTIVE VICE PRESIDENT, CHIEF OPERATING
OFFICER--MERCHANDISING, DISTRIBUTION AND CONSTRUCTION
AND DIRECTOR
By /s/ RICHARD A. GALANTI November 22, 1999
-------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER)
By /s/ DAVID S. PETTERSON November 22, 1999
-------------------------------------------
David S. Petterson
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
20
By /s/ DR. BENJAMIN S. CARSON, SR., M.D. November 22, 1999
-------------------------------------------
Dr. Benjamin S. Carson, Sr., M.D.
DIRECTOR
By /s/ HAMILTON E. JAMES November 22, 1999
-------------------------------------------
Hamilton E. James
DIRECTOR
By /s/ RICHARD M. LIBENSON November 22, 1999
-------------------------------------------
Richard M. Libensen
DIRECTOR
By /s/ JOHN W. MEISENBACH November 22, 1999
-------------------------------------------
John W. Meisenbach
DIRECTOR
By /s/ CHARLES T. MUNGER November 22, 1999
-------------------------------------------
Charles T. Munger
DIRECTOR
By /s/ FREDERICK O. PAULSELL November 22, 1999
-------------------------------------------
Frederick O. Paulsell
DIRECTOR
By /s/ JILL S. RUCKELSHAUS November 22, 1999
-------------------------------------------
Jill S. Ruckelshaus
DIRECTOR
21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Costco Wholesale Corporation:
We have audited the accompanying consolidated balance sheets of Costco
Wholesale Corporation (a Washington corporation) and subsidiaries ("Costco") as
of August 29, 1999 and August 30, 1998, and the related consolidated statements
of income, stockholders' equity and cash flows for the 52 weeks ended
August 29, 1999, August 30, 1998 and August 31, 1997. These financial statements
are the responsibility of Costco's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Costco as of August 29, 1999
and August 30, 1998, and the results of its operations and its cash flows for
the 52 weeks ended August 29, 1999, August 30, 1998 and August 31, 1997 in
conformity with generally accepted accounting principles.
As explained in Note 1 to the consolidated financial statements, 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.
ARTHUR ANDERSEN LLP
Seattle, Washington
October 5, 1999
22
COSTCO WHOLESALE CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
AUGUST 29, AUGUST 30,
1999 1998
----------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 440,586 $ 361,974
Short-term investments.................................... 256,688 75,549
Receivables, net.......................................... 168,648 171,613
Merchandise inventories, net.............................. 2,210,475 1,910,751
Other current assets...................................... 239,516 108,343
----------- ----------
Total current assets.................................... 3,315,913 2,628,230
----------- ----------
PROPERTY AND EQUIPMENT
Land and land rights...................................... 1,264,125 1,119,663
Buildings and leasehold and land improvements............. 2,444,640 2,170,896
Equipment and fixtures.................................... 1,138,568 948,515
Construction in progress.................................. 176,824 91,901
----------- ----------
5,024,157 4,330,975
Less-accumulated depreciation and amortization............ (1,117,269) (935,603)
----------- ----------
Net property and equipment.............................. 3,906,888 3,395,372
----------- ----------
OTHER ASSETS................................................ 282,200 236,218
----------- ----------
$ 7,505,001 $6,259,820
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 1,912,632 $1,605,533
Accrued salaries and benefits............................. 414,276 352,903
Accrued sales and other taxes............................. 122,932 102,367
Deferred membership income................................ 225,903 --
Other current liabilities................................. 190,490 136,139
----------- ----------
Total current liabilities............................... 2,866,233 2,196,942
LONG-TERM DEBT.............................................. 918,888 930,035
DEFERRED INCOME TAXES AND OTHER LIABILITIES................. 66,990 61,483
----------- ----------
Total liabilities....................................... 3,852,111 3,188,460
----------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST........................................... 120,780 105,474
----------- ----------
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value; 100,000,000 shares
authorized; no shares issued and outstanding............ -- --
Common stock $.01 par value; 900,000,000 shares
authorized; 221,368,000 and 217,589,000 shares issued
and outstanding......................................... 2,214 2,176
Additional paid-in capital................................ 952,758 817,628
Other accumulated comprehensive loss...................... (118,084) (151,842)
Retained earnings......................................... 2,695,222 2,297,924
----------- ----------
Total stockholders' equity.............................. 3,532,110 2,965,886
----------- ----------
$ 7,505,001 $6,259,820
=========== ==========
The accompanying notes are an integral part of these balance sheets.
23
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 29, AUGUST 30, AUGUST 31,
1999 1998 1997
----------- ----------- -----------
REVENUE
Net sales............................................... $26,976,453 $23,830,380 $21,484,118
Membership fees and other............................... 479,578 439,497 390,286
----------- ----------- -----------
Total revenue......................................... 27,456,031 24,269,877 21,874,404
OPERATING EXPENSES
Merchandise costs....................................... 24,170,199 21,379,691 19,314,485
Selling, general and administrative..................... 2,338,198 2,069,900 1,876,759
Preopening expenses..................................... 31,007 27,010 27,448
Provision for impaired assets and warehouse closing
costs................................................. 56,500 6,000 75,000
----------- ----------- -----------
Operating income...................................... 860,127 787,276 580,712
OTHER INCOME (EXPENSE)
Interest expense........................................ (45,527) (47,535) (76,281)
Interest income and other............................... 44,266 26,662 15,898
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE..................................... 858,866 766,403 520,329
Provision for income taxes.............................. 343,545 306,561 208,132
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE.... 515,321 459,842 312,197
Cumulative effect of accounting change, net of tax
benefit of $78,682.................................... (118,023) -- --
----------- ----------- -----------
NET INCOME.............................................. $ 397,298 $ 459,842 $ 312,197(a)
=========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic earnings per share:
Income before cumulative effect of accounting
change............................................ $ 2.35 $ 2.13 $ 1.51
Cumulative effect of accounting change, net of tax.... (0.54) -- --
----------- ----------- -----------
Net Income............................................ $ 1.81 $ 2.13 $ 1.51
=========== =========== ===========
Diluted earnings per share:
Income before cumulative effect of accounting
change............................................ $ 2.23 $ 2.03 $ 1.47
Cumulative effect of accounting change, net of tax.... (0.50) -- --
----------- ----------- -----------
Net Income............................................ $ 1.73 $ 2.03 $ 1.47(a)
=========== =========== ===========
Shares used in calculation (000's)
Basic................................................. 219,626 215,506 207,379
Diluted............................................... 235,560 231,685 224,668
Pro forma amounts assuming accounting change had been in
effect in fiscal 1998 and 1997:
Net Income............................................ $ 515,321 $ 444,451 $ 302,969
=========== =========== ===========
Earnings per common share--basic...................... $ 2.35 $ 2.06 $ 1.46
=========== =========== ===========
Earnings per common share--diluted.................... $ 2.23 $ 1.96 $ 1.43
=========== =========== ===========
- ------------------------
(a) Net income and net income per common equivalent share (diluted) would have
been $350,872 and $1.64, respectively, without the effect of adopting SFAS
No. 121, using 224,668 diluted shares.
The accompanying notes are an integral part of these financial statements.
24
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE 52 WEEKS ENDED AUGUST 29, 1999, AUGUST 30, 1998 AND AUGUST 31, 1997
(IN THOUSANDS)
OTHER
COMMON STOCK ADDITIONAL ACCUMULATED
------------------- PAID-IN COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL INCOME/(LOSS) EARNINGS TOTAL
-------- -------- ---------- ------------- ---------- ----------
BALANCE AT SEPTEMBER 1, 1996.......... 196,436 $1,964 $321,832 $ (71,883) $1,525,885 $1,777,798
Comprehensive Income
Net Income.......................... -- -- -- -- 312,197 312,197
Other accumulated comprehensive loss
Foreign currency translation
adjustment...................... -- -- -- (6,543) -- (6,543)
------- ------ -------- --------- ---------- ----------
Total comprehensive income............ -- -- -- (6,543) 312,197 305,654
Stock options exercised including
income tax benefits................. 4,077 41 78,186 -- -- 78,227
Conversion of convertible
debentures.......................... 13,080 131 306,306 -- -- 306,437
------- ------ -------- --------- ---------- ----------
BALANCE AT AUGUST 31, 1997............ 213,593 2,136 706,324 (78,426) 1,838,082 2,468,116
Comprehensive Income
Net Income.......................... -- -- -- -- 459,842 459,842
Other accumulated comprehensive loss
Foreign currency translation
adjustment...................... -- -- -- (73,416) -- (73,416)
------- ------ -------- --------- ---------- ----------
Total comprehensive income............ -- -- -- (73,416) 459,842 386,426
Stock options exercised including
income tax benefits................. 3,996 40 111,304 -- -- 111,344
------- ------ -------- --------- ---------- ----------
BALANCE AT AUGUST 30, 1998............ 217,589 2,176 817,628 (151,842) 2,297,924 2,965,886
Comprehensive Income
Net Income.......................... -- -- -- -- 397,298 397,298
Other accumulated comprehensive loss
Foreign currency translation
adjustment...................... -- -- -- 33,758 -- 33,758
------- ------ -------- --------- ---------- ----------
Total comprehensive income............ -- -- -- 33,758 397,298 431,056
Stock options exercised including
income tax benefits................. 3,234 33 110,282 -- -- 110,315
Conversion of convertible
debentures.......................... 545 5 24,848 -- -- 24,853
------- ------ -------- --------- ---------- ----------
BALANCE AT AUGUST 29, 1999............ 221,368 $2,214 $952,758 $(118,084) $2,695,222 $3,532,110
======= ====== ======== ========= ========== ==========
The accompanying notes are an integral part of these financial statements
25
COSTCO WHOLESALE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
AUGUST 29, AUGUST 30, AUGUST 31,
1999 1998 1997
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $397,298 $459,842 $312,197
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 224,811 196,315 181,759
Accretion of discount on zero coupon notes.............. 16,064 15,875 567
Net gain on sale of property and equipment and other.... (10,443) (3,459) (602)
Provision for impaired assets........................... 31,080 5,629 65,000
Change in deferred income taxes......................... (22,666) 20,420 (4,322)
Cumulative effect of accounting change, net of tax...... 118,023 -- --
Change in receivables, other current assets, accrued and
other current liabilities............................. 195,528 60,315 66,303
Increase in merchandise inventories..................... (286,902) (255,140) (189,323)
Increase in accounts payable............................ 284,238 243,164 162,628
Other................................................... (6,168) (5,351) (3,958)
-------- -------- --------
Total adjustments..................................... 543,565 277,768 278,052
-------- -------- --------
Net cash provided by operating activities................. 940,863 737,610 590,249
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment....................... (787,935) (571,904) (553,374)
Proceeds from the sale of property and equipment.......... 58,670 80,698 40,946
Investment in unconsolidated joint ventures............... (15,000) (11,595) (4,750)
Increase in short-term investments........................ (181,103) (75,549) --
Increase in other assets and other, net................... (28,555) (31,096) (25,995)
-------- -------- --------
Net cash used in investing activities................... (953,923) (609,446) (543,173)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments under short-term credit facilities, net........ -- (24,404) (33,990)
Net proceeds from issuance of long-term debt.............. 10,336 9,928 461,035
Repayments of long-term debt.............................. (11,675) (9,307) (471,791)
Changes in bank overdraft................................. 10,203 (3,321) (7,244)
Proceeds from minority interests.......................... 15,058 19,580 15,119
Exercise of stock options................................. 61,923 74,115 62,015
-------- -------- --------
Net cash provided by financing activities............... 85,845 66,591 25,144
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 5,827 (8,289) 1,333
-------- -------- --------
Net increase in cash and cash equivalents................. 78,612 186,466 73,553
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR................. 361,974 175,508 101,955
-------- -------- --------
CASH AND CASH EQUIVALENTS END OF YEAR....................... $440,586 $361,974 $175,508
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (excludes amounts capitalized and paid for
redemption premiums).................................... $ 27,107 $ 29,191 $ 76,233
Income taxes.............................................. $294,860 $257,352 $195,241
The accompanying notes are an integral part of these financial statements
26
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Costco
Wholesale Corporation, a Washington corporation, and its subsidiaries ("Costco"
or the "Company"). All inter-company transactions between the Company and its
subsidiaries, including The Price Company, have been eliminated in
consolidation. The Price Company and Costco Wholesale Corporation primarily
operate membership warehouses under the Costco Wholesale name.
Costco operates membership warehouses that offer very low prices on a
limited selection of nationally branded and selected private label products in a
wide range of merchandise categories in no-frills, self-service warehouse
facilities. At August 29, 1999, Costco operated 292 warehouse clubs: 221 in the
United States; 58 in Canada; seven in the United Kingdom; three in Korea; two in
Taiwan; and one in Japan. As of August 29, 1999, the Company also operated
(through a 50%-owned joint venture) 16 warehouses in Mexico.
The Company's investment in the Price Club Mexico joint venture and in other
unconsolidated joint ventures that are less than majority owned are accounted
for under the equity method.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year basis, which ends on the
Sunday nearest August 31st. Fiscal years 1999, 1998, and 1997 were 52 weeks.
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.
SHORT-TERM INVESTMENTS
At August 29, 1999 and August 30, 1998, short-term investments consisted of
the following:
1999 1998
-------- --------
Municipal securities........................................ $ 97,966 $ --
Corporate notes and bonds................................... 89,872 14,008
U.S. Treasury/Agency securities............................. 43,699 32,566
Certificates of deposit..................................... 24,841 28,883
Other....................................................... 310 92
-------- -------
Total short-term investments............................ $256,688 $75,549
======== =======
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 August 29, 1999 or August 30, 1998. Realized gains and losses are
included in interest income and were not significant in fiscal 1999 or 1998.
27
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECEIVABLES
Receivables consist primarily of vendor rebates and promotional allowances
and other miscellaneous amounts due to the Company, and are net of allowance for
doubtful accounts of $4,582 at August 29, 1999 and $4,297 at August 30, 1998.
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 $12,150 at
August 29, 1999 and $16,150 at August 30, 1998.
AUGUST 29, AUGUST 30,
1999 1998
---------- ----------
Merchandise inventories consist of:
United States (primarily LIFO)..................... $1,799,101 $1,587,285
Foreign (FIFO)..................................... 411,374 323,466
---------- ----------
Total............................................ $2,210,475 $1,910,751
========== ==========
The Company provides for estimated inventory losses between physical
inventory counts on the basis of a standard percentage of sales. This provision
is adjusted periodically to reflect the actual shrinkage results of the physical
inventory counts, which generally occur in the second and fourth quarters of the
Company's fiscal year.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
expenses are computed using the straight-line method for financial reporting
purposes and accelerated methods for tax purposes. Buildings are depreciated
over twenty-five to thirty-five years; equipment and fixtures are depreciated
over three to ten years; and land rights and leasehold improvements are
amortized over the initial term of the lease.
Interest costs incurred on property and equipment during the construction
period are capitalized. The amount of interest costs capitalized was $4,380 in
fiscal 1999, $3,542 in fiscal 1998, and $4,097 in fiscal 1997.
GOODWILL
Goodwill, included in other assets, totaled $42,568 at August 29,1999 and
$43,229 at August 30, 1998, resulting from certain previous business
combinations. Goodwill is being amortized over 5 to 40 years using the
straight-line method. Accumulated amortization was $14,787 at August 29, 1999
and $12,686 at August 30, 1998.
28
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
In the second quarter of fiscal 1998, the Company adopted the Financial
Accounting Standards Board (FASB) Statement No. 128, "Earnings per Share" (SFAS
No. 128). SFAS No. 128 established new standards for computing and presenting
earnings per share (EPS) for entities with publicly held common stock.
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.
52 WEEKS ENDED
---------------------------------------------------
AUGUST 29, 1999 AUGUST 30, 1998 AUGUST 31, 1997
--------------- --------------- ---------------
Net income available to common
stockholders used in basic EPS... $397,298 $459,842 $312,197
Interest on convertible bonds, net
of tax........................... 9,640 9,529 17,325
-------- -------- --------
Net income available to common
stockholders after assumed
conversions of dilutive
securities....................... $406,938 $469,371 $329,522
======== ======== ========
Weighted average number of common
shares used in basic EPS......... 219,626 215,506 207,379
Stock options...................... 5,946 5,960 4,001
Conversion of convertible bonds.... 9,988 10,219 13,288
-------- -------- --------
Weighted number of common shares
and dilutive potential common
stock used in diluted EPS........ 235,560 231,685 224,668
======== ======== ========
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. 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, as
well as from future operating cash flows. The repurchased shares would
constitute authorized, but unissued shares and would be used for general
corporate purposes including stock option grants under stock option programs. As
of August 29, 1999, the Company had not repurchased any stock under the program.
PREOPENING EXPENSES
Preopening expenses related to new warehouses, major remodels/expansions,
regional offices and other startup operations are expensed as incurred.
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
29
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting for membership fee income from a "cash basis" to a "deferred basis"
whereby membership fee income is recognized ratably over the one-year life of
the membership. The change to the deferred method of accounting for membership
fees resulted in a one-time, non-cash, pre-tax charge of approximately $196,705
($118,023 after-tax, or $.50 per diluted share) to reflect the cumulative effect
of the accounting change as of the beginning of fiscal 1999. If the deferred
method of accounting for membership fee income had been in effect in fiscal 1998
and 1997, net income would have been $444,451, or $1.96 per diluted share and
$302,969, or $1.43 per diluted share respectively.
FOREIGN CURRENCY TRANSLATION
The accumulated foreign currency translation relates to the Company's
consolidated foreign operations as well as its investment in the Price Club
Mexico joint venture. Foreign currency translation is determined by application
of the current rate method and included in the determination of consolidated
stockholders' equity and comprehensive income at the respective balance sheet
dates.
Cumulative inflation in Mexico exceeded 100% in the three-year calendar
period 1994-1996, requiring a hyper-inflationary accounting treatment for the
Company's Mexico joint venture operations in calendar year 1997. Foreign
currency translation gains or losses were reflected in the Statement of Income
rather than as an adjustment to stockholders' equity during this period.
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.
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
FISCAL 1999 NON-CASH ACTIVITIES
- In March 1999, approximately $48,000 principal amount of the $900,000,
3 1/2% Zero Coupon Convertible Subordinated Notes were converted into
approximately 545 thousand shares of Costco Common Stock.
FISCAL 1998 NON-CASH ACTIVITIES
- None.
FISCAL 1997 NON-CASH ACTIVITIES
- In December 1996, approximately $159,400 principal amount of the $285,100,
6 3/4% Convertible Subordinated Debentures were converted into
approximately 7.1 million shares of Costco Common Stock as a result of a
call for redemption of the Convertible Subordinated Debentures.
- In January 1997, approximately $142,700 principal amount of the $179,300,
5 1/2% Convertible Subordinated Debentures were converted into
approximately 6.0 million shares of Costco Common Stock as a result of the
call for redemption of the Convertible Subordinated Debentures.
30
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 inventory purchases. The amount of interest
rate and foreign exchange contracts outstanding at year-end or in place during
fiscal 1999 was immaterial to the Company's results of operations or its
financial position.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121),
as of the first quarter of fiscal 1997. In accordance with SFAS No. 121, the
Company recorded pretax, non-cash charges of $31,080, $5,629 and $65,000 in
fiscal 1999, 1998 and 1997, respectively, reflecting its estimate of impairment
relating principally to excess property and closed warehouses. The charge
reflects the difference between carrying value and fair value, which was based
on market valuations for those assets whose carrying value was not recoverable
through future cash flows. The Company periodically evaluates the realizability
of long-lived assets based on expected future cash flows.
WAREHOUSE CLOSING COSTS
The Company recorded a charge of $30,865 for warehouse and other facility
closing costs in fiscal 1999. This charge includes $24,773 for lease obligations
and $6,092 for other expenses directly related to the closedown of warehouses
and other facilities. As of August 29, 1999, the Company had expended $828 for
lease obligations and $3,339 for other closedown expenses. Warehouse closing
costs incurred relate principally to the Company's decision in the fourth
quarter of fiscal 1999 to relocate several warehouses that were not otherwise
impaired to larger and better-located facilities.
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
will not have a material impact on its results of operations or financial
position.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
31
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has in place a $425,000 commercial paper program supported by a
$425,000 bank credit facility with a group of nine banks, of which $175,000
expires on January 24, 2000, and $250,000 expires on January 30, 2001. At
August 29, 1999, no amount was 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, of which $57,000 expires in March 2000, and $37,000 expires in
March 2001. At August 29, 1999, no amount was outstanding under the bank credit
facility or the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $519,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $294,200. The outstanding
commitments under these facilities at August 29, 1999 totaled approximately
$176,500, including approximately $45,300 in standby letters of credit.
SHORT-TERM BORROWINGS
The weighted average borrowings, highest borrowings and interest rate under
all short-term borrowing arrangements were as follows for fiscal 1999 and 1998:
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE DURING THE DURING THE DURING THE
SHORT-TERM BORROWINGS PERIOD PERIOD PERIOD
- --------------------- -------------- -------------- ----------------
PERIOD ENDED AUGUST 29, 1999
Bank borrowings:
U.S........................... $-- $-- -- %
Canadian...................... 5,753 87 6.50
Commercial Paper:
U.S........................... -- -- --
Canadian...................... 13,380 682 4.84
PERIOD ENDED AUGUST 30, 1998
Bank borrowings:
U.S........................... $-- $-- -- %
Canadian...................... 5,399 215 6.85
Commercial Paper:
U.S........................... -- -- --
Canadian...................... 34,390 5,841 3.61
32
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--DEBT (CONTINUED)
LONG-TERM DEBT
Long-term debt at August 29, 1999 and August 30, 1998:
1999 1998
-------- --------
7 1/8% Senior Notes due June 2005....................... $300,000 $300,000
3 1/2% Zero Coupon convertible subordinated notes due
August 2017........................................... 456,783 466,082
Unsecured note payable to banks due April 2001.......... 140,000 140,000
Notes payable secured by trust deeds on real estate..... 12,723 13,667
Capital lease obligations and other..................... 21,213 21,030
-------- --------
930,719 940,779
Less current portion (included in other current
liabilities).......................................... 11,831 10,744
-------- --------
Total long-term debt.................................... $918,888 $930,035
======== ========
The Company issued $300,000 of 7 1/8% Senior Notes in fiscal 1995. Interest
on the notes is payable semiannually on June 15 and December 15. The indentures
contain certain limitations on the Company's and certain subsidiaries' ability
to create liens securing indebtedness and to enter into certain sale leaseback
transactions.
In April 1996, the Company borrowed $140,000 from a group of banks under a
five-year unsecured term loan. Interest only is payable quarterly at rates based
on LIBOR. Proceeds of the loan were used to retire $40,000 outstanding under the
Canadian commercial paper program and $100,000 outstanding under the U.S.
commercial paper program.
On August 19, 1997, the Company completed the sale of $900,000 principal
amount at maturity of Zero Coupon Subordinated Notes (the "Notes") due
August 19, 2017. The Notes were priced with a yield to maturity of 3 1/2%,
resulting in gross proceeds to the Company of $449,640. The Notes are
convertible into a maximum of 10,219,090 shares of Costco Common Stock at an
initial conversion price of $44.00. Holders of the Notes may require the Company
to purchase the Notes (at the discounted issue price plus accrued interest to
date of purchase) on August 19, 2002, 2007, or 2012. The Company, at its option,
may redeem the Notes (at the discounted issue price plus accrued interest to
date of redemption) any time on or after August 19, 2002. On March 29, 1999,
$48,000 principal amount of the Zero Coupon Notes were converted by note holders
to 545,016 shares of Costco Common Stock.
In February, 1996, the Company filed with the Securities and Exchange
Commission a shelf registration statement for $500,000 of senior debt
securities. Although the registration statement was declared effective, no
securities have been issued under this filing.
At August 29, 1999, the fair value of the 7 1/8% Senior Notes, based on
market quotes, was approximately $300,900. The Senior Notes are not redeemable
prior to maturity. The fair value of the 3 1/2% Zero Coupon Subordinated Notes
at August 29, 1999, based on market quotes, was approximately $781,369. The fair
value of other long-term debt approximates carrying value.
33
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--DEBT (CONTINUED)
Maturities of long-term debt during the next five fiscal years and
thereafter are as follows:
2000........................................................ $ 11,831
2001........................................................ 146,330
2002........................................................ 3,067
2003........................................................ 1,133
2004........................................................ 1,249
Thereafter.................................................. 767,109
--------
Total..................................................... $930,719
========
NOTE 3--LEASES
The Company leases land and/or warehouse buildings at 64 of the 292
warehouses open at August 29, 1999, and certain other office and distribution
facilities under operating leases with remaining terms ranging from 2 to
30 years. These leases generally contain one or more of the following options
which the Company can exercise at the end of the initial lease term:
(a) renewal of the lease for a defined number of years at the then fair market
rental rate; (b) purchase of the property at the then fair market value; or
(c) right of first refusal in the event of a third party purchase offer. Certain
leases provide for periodic rental increases based on the price indices and some
of the leases provide for rents based on the greater of minimum guaranteed
amounts or sales volume. Contingent rents have not been material. Additionally,
the Company leases certain equipment and fixtures under short-term operating
leases that permit the Company to either renew for a series of one-year terms or
to purchase the equipment at the then fair market value.
Aggregate rental expense for fiscal 1999, 1998, and 1997, was $59,263,
$55,375, and $54,019, respectively. Future minimum payments during the next five
fiscal years and thereafter under non-cancelable leases with terms in excess of
one year, at August 29, 1999, were as follows:
2000........................................................ $ 64,406
2001........................................................ 62,508
2002........................................................ 62,153
2003........................................................ 60,645
2004........................................................ 59,160
Thereafter.................................................. 619,690
--------
Total minimum payments.................................... $928,562
========
NOTE 4--STOCK OPTIONS
The Costco Companies, Inc. 1993 Combined Stock Grant and Stock Option Plan
(the New Stock Option Plan) provides for the issuance of up to 30 million shares
of the Company's common stock upon the exercise of stock options or up to
1,666,666 shares through stock grants. Prior to the merger of The Price Company
and Costco Wholesale Corporation, various incentive and non-qualified stock
option plans existed which allowed certain key employees and directors to
purchase or be granted common stock of The
34
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--STOCK OPTIONS (CONTINUED)
Price Company and Costco Wholesale Corporation (collectively the Old Stock
Option Plans). Options were granted for a maximum term of ten years, and were
exercisable upon vesting. Options granted under these plans generally vest
ratably over five to nine years. Subsequent to the merger, new grants of options
have not been made under the Old Stock Option Plans.
The Company applies Accounting Principles Board Opinion (APB) No. 25 and
related Interpretations in accounting for stock options. Accordingly, no
compensation cost has been recognized for the plans. Had compensation cost for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with Statement
of Financial Accounting Standards No. 123 (SFAS No.123), "Accounting for
Stock-Based Compensation", the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
1999 1998 1997
-------- -------- --------
Net income:
As reported................................. $397,298 $459,842 $312,197
Pro forma................................... $352,660 $438,053 $301,947
Net income per share (diluted):
As reported................................. $ 1.73 $ 2.03 $ 1.47
Pro forma................................... $ 1.54 $ 1.93 $ 1.42
The effects of applying SFAS No. 123 on pro forma disclosures of net income
and earnings per share for fiscal 1999, 1998 and 1997 are not likely to be
representative of the pro forma effects on net income and earnings per share in
future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997:
1999 1998 1997
-------- -------- --------
Risk free interest rate........................... 5.09% 5.60% 6.40%
Expected life..................................... 7 years 7 years 7 years
Expected volatility............................... 37% 34% 34%
Expected dividend yield........................... 0% 0% 0%
35
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--STOCK OPTIONS (CONTINUED)
Stock option transactions relating to the aggregate of the Old and New Stock
Option Plans are summarized below (shares in thousands):
1999 1998 1997
------------------- ------------------- -------------------
SHARES PRICE(1) SHARES PRICE(1) SHARES PRICE(1)
-------- -------- -------- -------- -------- --------
Under option at beginning of year........... 17,302 $27.03 17,321 $19.96 16,972 $17.14
Granted (2)................................. 4,553 73.79 4,214 47.67 4,610 26.13
Exercised................................... (3,262) 19.89 (3,996) 18.59 (4,077) 15.24
Cancelled................................... (204) 36.68 (237) 19.81 (184) 18.37
------ ------ ------ ------ ------ ------
Under option at end of year................. 18,389 $39.77 17,302 $27.03 17,321 $19.96
====== ====== ====== ====== ====== ======
- ------------------------
(1) Weighted-average exercise price
(2) The weighted-average fair value of options granted during fiscal 1999, 1998
and 1997, were $31.00, $19.71, and $11.47, respectively.
The following table summarizes information regarding stock options
outstanding at August 29, 1999:
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
--------------------------------- -------------------
REMAINING
CONTRACTUAL
RANGE OF PRICES NUMBER LIFE(1) PRICE(1) NUMBER PRICE(1)
- --------------- -------- ----------- -------- -------- --------
$ 9.88 - $25.50.................................. 6,226 4.4 $17.22 4,100 $33.52
$26.63 - $45.75.................................. 6,280 7.6 34.65 1,799 52.87
$46.63 - $89.94.................................. 5,883 9.3 69.11 345 59.66
------ --- ------ ----- ------
18,389 7.1 $39.77 6,244 $42.37
====== === ====== ===== ======
- ------------------------
(1) Weighted-average
At August 30, 1998 and August 31, 1997, there were 5,926 and 7,118 options
exercisable at weighted average exercise prices of $19.65 and $18.85,
respectively.
NOTE 5--RETIREMENT PLANS
The Company has a 401(k) Retirement Plan that is available to all U.S.
employees who have one year or more of service, except California union
employees. The plan allows pre-tax deferral against which the Company matches
50% of the first one thousand dollars of employee contributions. In addition,
the Company will provide each eligible participant a contribution based on
salary and years of service. The Company has a defined contribution plan for
Canadian and United Kingdom employees and contributes a percentage of each
employee's salary.
36
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--RETIREMENT PLANS (CONTINUED)
California union employees participate in a defined benefit plan sponsored
by their union. The Company makes contributions based upon its union agreement.
In June 1995, the Company also established a 401(k) plan for the California
union employees. The plan currently allows pre-tax deferral against which the
Company matches 50% of the first four hundred dollars of employee annual
contributions.
Amounts expensed under these plans were $85,974, $73,764, and $59,960 for
fiscal 1999, 1998, and 1997, respectively. The Company has defined contribution
401(k) and retirement plans only, and thus has no liability for post-retirement
benefit obligations under the SFAS No. 106 "Employer's Accounting for
Post-retirement Benefits Other than Pensions."
NOTE 6--INCOME TAXES
The provisions for income taxes for fiscal 1999, 1998, and 1997 are as
follows:
1999 1998 1997
-------- -------- --------
Federal:
Current................................... $259,104 $214,788 $151,433
Deferred.................................. (70,248) (3,415) (13,249)
-------- -------- --------
Total federal........................... 188,856 211,373 138,184
-------- -------- --------
State:
Current................................... 54,701 49,881 34,666
Deferred.................................. (13,418) (2,231) (3,178)
-------- -------- --------
Total state............................. 41,283 47,650 31,488
-------- -------- --------
Foreign:
Current................................... 52,416 47,096 40,192
Deferred.................................. (17,692) 442 (1,732)
-------- -------- --------
Total foreign........................... 34,724 47,538 38,460
-------- -------- --------
Total provision for income taxes........ $264,863(a) $306,561 $208,132
======== ======== ========
- ------------------------
(a) Total provision for income taxes includes a provision on income before the
cumulative effect of accounting change of $343,545 and a tax benefit of
$78,682 resulting from the cumulative effect of accounting change.
37
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6--INCOME TAXES (CONTINUED)
Reconciliation between the statutory tax rate and the effective rate for
fiscal 1999, 1998, and 1997 is as follows:
1999 1998 1997
---------------- ---------------- ----------------
Federal taxes at statutory rate........ $231,756 35.00% $268,241 35.00% $182,115 35.00%
State taxes, net....................... 28,870 4.36 33,722 4.40 22,374 4.30
Foreign taxes, net..................... 10,532 1.59 8,543 1.11 5,452 1.05
Other.................................. (6,295) (0.95) (3,945) (0.51) (1,809) (.35)
-------- ----- -------- ----- -------- -----
Provision at effective tax rate...... $264,863 40.00% $306,561 40.00% $208,132 40.00%
======== ===== ======== ===== ======== =====
The components of the deferred tax assets and liabilities are as follows:
AUGUST 29, 1999 AUGUST 30, 1998
---------------- ----------------
Accrued liabilities.............................. $118,912 $93,158
Deferred membership fees......................... 78,151 --
Other............................................ 15,589 14,010
-------- -------
Total deferred tax assets...................... 212,652 107,168
-------- -------
Property and equipment........................... 52,795 67,293
Merchandise inventories.......................... 42,551 33,589
Other............................................ 10,684 1,022
-------- -------
Total deferred tax liabilities................. 106,030 101,904
-------- -------
Net deferred tax assets.......................... $106,622 $ 5,264
======== =======
The deferred tax accounts at August 29, 1999 and August 30, 1998 include
current deferred income tax assets of $164,839 and $59,667, respectively, and
non-current deferred income tax liabilities of $58,217 and $54,403,
respectively. Current deferred income tax assets are included in other current
assets.
NOTE 7--COMMITMENTS AND CONTINGENCIES
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.
NOTE 8--SEGMENT REPORTING
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which established reporting
and disclosure standards for an enterprise's operating segments. Operating
segments are defined as components of an enterprise for which separate financial
information is available and regularly reviewed by the Company's senior
management.
38
COSTCO WHOLESALE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--SEGMENT REPORTING (CONTINUED)
The Company and its subsidiaries are principally engaged in the operation of
membership warehouses in the United States, Canada, Japan and 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.
OTHER
UNITED STATES CANADIAN INTERNATIONAL
OPERATIONS OPERATIONS OPERATIONS TOTAL
------------- ---------- ------------- -----------
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
YEAR ENDED AUGUST 30, 1998
Total revenue............................. $19,620,552 $4,030,766 $618,559 $24,269,877
Operating income (loss)................... 648,429 142,807 (3,960) 787,276
Depreciation and amortization............. 154,680 32,113 9,522 196,315
Capital expenditures...................... 448,173 55,373 68,358 571,904
Total assets.............................. 4,984,571 847,430 427,879 6,259,820
YEAR ENDED AUGUST 31, 1997
Total revenue............................. $17,544,247 $3,907,185 $422,972 $21,874,404
Operating income (loss)................... 458,600 124,761 (2,649) 580,712
Depreciation and amortization............. 144,506 30,874 6,379 181,759
Capital expenditures...................... 454,267 34,803 64,304 553,374
Total assets.............................. 4,224,668 851,103 400,543 5,476,314
NOTE 9--QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables that follow on the next two pages reflect the unaudited quarterly
results of operations for fiscal 1999 and 1998.
39
COSTCO WHOLESALE CORPORATION
QUARTERLY STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED AUGUST 29, 1999
-----------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
12 WEEKS 12 WEEKS 12 WEEKS 16 WEEKS 52 WEEKS
------------- -------------- ------------- -------------- -----------
REVENUE
Net sales........................ $5,894,238 $6,484,445 $5,941,049 $8,656,721 $26,976,453
Membership fees and other........ 103,840 107,913 112,771 155,054 479,578
---------- ---------- ---------- ---------- -----------
Total revenue.................. 5,998,078 6,592,358 6,053,820 8,811,775 27,456,031
OPERATING EXPENSES
Merchandise costs................ 5,287,785 5,788,653 5,341,716 7,752,045 24,170,199
Selling, general and
administrative................. 518,990 543,565 528,158 747,485 2,338,198
Preopening expenses.............. 10,707 3,951 6,120 10,229 31,007
Provision for impaired assets and
warehouse closing costs........ 2,000 3,000 1,500 50,000 56,500
---------- ---------- ---------- ---------- -----------
Operating income............... 178,596 253,189 176,326 252,016 860,127
OTHER INCOME (EXPENSE)
Interest expense................. (10,912) (10,995) (10,524) (13,096) (45,527)
Interest income and other........ 6,039 11,192 10,659 16,376 44,266
---------- ---------- ---------- ---------- -----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE........................... 173,723 253,386 176,461 255,296 858,866
Provision for income taxes....... 69,489 101,354 70,584 102,118 343,545
---------- ---------- ---------- ---------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE................ 104,234 152,032 105,877 153,178 515,321
Cumulative effect of accounting
change, net of tax benefit of
$78,682........................ (118,023) -- -- -- (118,023)
---------- ---------- ---------- ---------- -----------
NET INCOME......................... $ (13,789) $ 152,032 $ 105,877 $ 153,178 $ 397,298
========== ========== ========== ========== ===========
NET INCOME PER COMMON SHARE:
Basic Earnings per share:
Income before cumulative effect
of accounting change......... $ 0.48 $ 0.69 $ 0.48 $ 0.69 $ 2.35
Cumulative effect of accounting
change, net of tax........... (0.54) -- -- -- (0.54)
---------- ---------- ---------- ---------- -----------
Net Income..................... $ (0.06) $ 0.69 $ 0.48 $ 0.69 $ 1.81
========== ========== ========== ========== ===========
Diluted earnings per share:
Income before cumulative effect
of accounting change......... $ 0.46 $ 0.66 $ 0.46 $ 0.66 $ 2.23
Cumulative effect of accounting
change, net of tax........... (0.51) -- -- -- (0.50)
---------- ---------- ---------- ---------- -----------
Net Income..................... $ (0.05) $ 0.66 $ 0.46 $ 0.66 $ 1.73
========== ========== ========== ========== ===========
Shares used in calculation (000's):
Basic............................ 217,838 218,891 220,219 221,076 219,626
Diluted.......................... 233,387 235,227 236,785 236,480 235,560
40
COSTCO WHOLESALE CORPORATION
QUARTERLY STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED AUGUST 30, 1998
-----------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
12 WEEKS 12 WEEKS 12 WEEKS 16 WEEKS 52 WEEKS
------------- -------------- ------------- -------------- -----------
REVENUE
Net sales........................ $5,321,256 $5,697,098 $5,241,926 $7,570,100 $23,830,380
Membership fees and other........ 108,507 97,908 96,160 136,922 439,497
---------- ---------- ---------- ---------- -----------
Total revenue.................. 5,429,763 5,795,006 5,338,086 7,707,022 24,269,877
OPERATING EXPENSES
Merchandise costs................ 4,779,296 5,098,992 4,715,755 6,785,648 21,379,691
Selling, general and
administrative................. 470,711 478,732 466,987 653,470 2,069,900
Preopening expenses.............. 7,343 4,071 8,884 6,712 27,010
Provision for impaired assets and
warehouse closing costs........ 2,000 -- 1,500 2,500 6,000
---------- ---------- ---------- ---------- -----------
Operating income............... 170,413 213,211 144,960 258,692 787,276
OTHER INCOME (EXPENSE)
Interest expense................. (10,923) (10,965) (10,477) (15,170) (47,535)
Interest income and other........ 3,720 7,743 7,562 7,637 26,662
---------- ---------- ---------- ---------- -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................ 163,210 209,989 142,045 251,159 766,403
Provision for income taxes....... 65,284 83,996 56,818 100,463 306,561
---------- ---------- ---------- ---------- -----------
NET INCOME......................... $ 97,926 $ 125,993 $ 85,227 $ 150,696 $ 459,842
========== ========== ========== ========== ===========
NET INCOME PER COMMON SHARE:
Basic............................ $ 0.46 $ 0.59 $ 0.39 $ 0.69 $ 2.13
Diluted.......................... $ 0.44 $ 0.56 $ 0.38 $ 0.66 $ 2.03
Shares used in calculation (000's):
Basic............................ 213,833 214,590 215,913 217,142 215,506
Diluted.......................... 229,413 230,482 232,378 233,501 231,685
Pro forma amounts assuming
accounting change had been in
effect in fiscal 1998............
Net Income....................... $ 87,966 $ 123,586 $ 84,730 $ 148,169 $ 444,451
========== ========== ========== ========== ===========
Earnings per common
share--basic................... $ 0.41 $ 0.58 $ 0.39 $ 0.68 $ 2.06
========== ========== ========== ========== ===========
Earnings per common
share--diluted................. $ 0.39 $ 0.55 $ 0.37 $ 0.65 $ 1.96
========== ========== ========== ========== ===========
41
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K
or are incorporated herein by reference. Where an exhibit is incorporated by
reference, the number that follows the description of the exhibit indicates the
document to which cross-reference is made. See the end of this exhibit index for
a listing of cross-reference documents.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1.1 Amended and Restated Agreement of Transfer and Plan of
Exchange dated as of November 14, 1994 by and between
Price/Costco, Inc. and Price Enterprises, Inc.(1)
2.1.2 Agreement Concerning Transfer of Certain Assets between and
among Price/Costco, Inc., Price Enterprises, Inc., The
Price Company, Price Costco International, Inc., Costco
Wholesale Corporation, Price Global Trading, L.L.C.,
PGT, Inc., Price Quest, L.L.C., and PQI, Inc., dated as of
November 21, 1996, with an effective date of May 28, 1997(2)
2.1.3 Amendment No. 1 to Agreement Concerning Transfer of Certain
Assets dated May 29, 1997(2)
3.1 Amended and Restated Articles of Incorporation of Costco
Wholesale Corporation(3)
3.2 Bylaws of Costco Companies, Inc.(4)
4.1.1 Form of 7 1/8% Senior Notes(5)
4.1.2 Indenture between Price/Costco, Inc. and American National
Association, as Trustee(5)
4.2.1 Form of Zero Coupon Note due 2017(2)
4.2.2 Indenture dated as of August 19, 1997 between Costco
Companies, Inc. and Firstar Bank of Minnesota as Trustee(2)
4.2.3 Registration Rights Agreement dated August 19, 1997(2)
4.3 Costco Wholesale Corporation Stock Certificate
10.1.1 Costco Companies, Inc. 1993 Combined Stock Grant and Stock
Option Plan(1)
10.1.2 Amendments to Stock Option Plan, 1995(9)
10.1.3 Amendments to Stock Option Plan, 1997(10)
10.2 Form of Indemnification Agreement(6)
10.4 Restated Corporate Joint Venture Agreement between The Price
Company, Price Venture Mexico and Controladora Comercial
Mexicana S.A. de C.V. dated March 1995(7)
10.5.1 A $250 million Short-Term Revolving Credit Agreement among
Price/Costco, Inc. and a group of twelve banks dated
January 31, 1994, as amended(8)
10.5.2 A $250 million Extended Revolving Credit Agreement among
Price/Costco, Inc. and a group of twelve banks, dated
January 31, 1994, as amended(8)
10.5 A $140 million Credit Agreement, dated as of April 11, 1996,
among Price/Costco Nova Scotia Company, certain financial
institutions and Canadian Imperial Bank of Commerce(7)
12.1 Statements re computation of ratios
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
- ------------------------
(1) Incorporated by reference to the exhibits filed as part of the Registration
Statement of Price/ Costco, Inc. on Form S-4 (File No. 33-50359) dated
September 22, 1993
42
(2) Incorporated by reference to the exhibits filed as part of the Annual
Report on Form 10-K of Costco Companies, Inc. for the fiscal year ended
August 31, 1997.
(3) Incorporated by reference to the exhibits filed as part of the Current
Report on Form 8-K filed by Costco Wholesale Corporation on August 30,
1999.
(4) Incorporated by reference to the exhibits filed as part of the Annual
Report on Form 10-K/A of Price/Costco, Inc. for the fiscal year ended
August 29, 1993
(5) Incorporated by reference to the exhibits filed as part of the Registration
Statement of Price/ Costco, Inc. on Form S-3 (File No. 33-59403) dated
May 17, 1995
(6) Incorporated by reference to the exhibits filed as part of the Annual
Report on Form 10-K of Price/ Costco, Inc. for the fiscal year ended
August 28, 1994
(7) Incorporated by reference to the exhibits filed as part of the Annual
Report on Form 10-K of Price/ Costco, Inc. for the fiscal year ended
September 1, 1996
(8) Incorporated by reference to the exhibits filed as part of the Quarterly
Report on Form 10-Q of Price/Costco, Inc. for the quarterly period ended
February 13, 1994
(9) Incorporated by reference to the exhibits filed as part of the Annual
Report on Form 10-K of Price/ Costco, Inc. for the fiscal year ended
September 3, 1995
(10) Incorporated by reference to the exhibits filed as part of the Annual
Report on Form 10-K of Costco Companies, Inc. for the fiscal year ended
August 30, 1998.
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