Costco 1998 Annual Report Download - page 15

MERRILL CORPORATION NETWORK COMPOSITION SYSTEM BSANDFO // 1-DEC-98 23:38 DISK004:[98SEA7.98SEA2097]DM2097A.;7
IMAGES:[PAGER.PSTYLES]MRLL.BST;4 pag$fmt:mrll.fmt Free: 110D*/ 240D Foot: 0D/ 0D VJ R Seq: 4 Clr: 0
COSTCO COMPANIES A/R (Y/E 8-31-98) Proj: P1826SEA98 Job: 98SEA2097 File: DM2097A.;7
Merrill/Seattle [phone] Page Dim: 8.250N X 10.750NCopy Dim: 38. X 54.3
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 31⁄2%, resulting in gross
proceeds to the Company of $449,640, approximately $312,000 of which was used to redeem the 53⁄4%
convertible subordinated debentures referred to above.
Interest income and other totaled $15,898 in fiscal 1997, and $10,832 in fiscal 1996. This increase was
primarily due to the Company terminating certain unconsolidated joint ventures which had been incurring
losses and improved earnings in its Mexico joint venture operation.
The effective income tax rate on earnings in fiscal 1997 was 40.00% compared to a 41.25% effective
tax rate in fiscal 1996. The decrease in the effective tax rate was related primarily to decreases in foreign
taxes.
Liquidity and Capital Resources
(dollars in thousands)
Expansion Plans
Costco’s primary requirement for capital is the financing of the land, building and equipment costs for
new warehouses plus the costs of initial warehouse operations and working capital requirements, as well as
additional capital for international expansion through investments in foreign subsidiaries and joint
ventures.
While there can be no assurance that current expectations will be realized, and plans are subject to
change upon further review, it is management’s current intention to spend an aggregate of approximately
$525,000 to $575,000 during fiscal 1999 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and approximately $75,000 to
$125,000 for international expansion, including the United Kingdom, Asia, Mexico and other potential
ventures. These expenditures will be financed with a combination of cash provided from operations, the
use of cash and cash equivalents and short-term investments (which totaled $437,523 at August 30, 1998),
short-term borrowings under revolving credit facilities and other financing sources as required.
On May 4, 1998, the Company announced the formation of a joint venture in the Republic of Korea
with Shinsegae Department Store Co., Ltd. (‘‘Shinsegae’’) to acquire the membership warehouse club
operation from Shinsegae. Previously, Shinsegae had operated two warehouse clubs under the name Price
Club, for which Shinsegae had paid a license fee. The joint venture operation became effective on June 1,
1998. Initial capitalization of the joint venture totaled approximately $100,000, with the company being a
93.75% owner and Shinsegae being a 6.25% owner. Approximately $80,000 of the initial investment was
used for land and building acquisitions, and the remaining approximately $20,000 was used to purchase
merchandise inventories and other assets, and for working capital purposes. The Company has increased
its ownership percentage of the joint venture to 94.32% through additional capital contributions.
On May 28, 1998, the Company announced the signing of a lease by its wholly-owned Japan
subsidiary, Costco Wholesale Japan, Ltd., for the lease of land and construction of a Costco warehouse in
Fukuoka, Japan. The term of the lease is 20 years. The warehouse is scheduled to open in Spring 1999.
Expansion plans for the United States and Canada during fiscal 1999 are to open approximately 25
new warehouse clubs, including three or four relocations of existing warehouses to larger and better-
located warehouses. The Company expects to continue expansion of its international operations and plans
to open one or two additional units in the United Kingdom through its 60%-owned subsidiary and one or
two additional units 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 30, 1998, Price Club Mexico operated 14 Price Club
13
9 C Cs: 18950