Costco 2004 Annual Report Download - page 25

The nature and amount of the Company’s long and short-term debt can be expected to vary as a result of
future business requirements, market conditions and other factors. As of August 29, 2004, the Company’s fixed
rate long-term debt includes its $851,648 principal amount at maturity Zero Coupon Subordinated Notes and
additional notes and capital lease obligations totaling $130,561. The Company’s debt also includes $300,000
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1
⁄ 8 % Senior Notes and $300,000 5
1
⁄ 2 % Senior Notes. The Company has entered into “fixed-to-floating” interest
rate swaps on the Senior Notes, effectively converting these fixed interest rate securities to variable rate secu-
rities. Fluctuations in interest rates may affect the fair value of the fixed rate debt and may affect the interest ex-
pense related to the variable rate debt.
The Company holds interest-bearing instruments that are classified as cash and cash equivalents and short-
term investments. Short-term investments generally have a maturity of three months to five years from the pur-
chase date. Investments with maturities beyond one year may be classified as short-term based on their highly
liquid nature and because such marketable securities represent the investment of cash that is available for current
operations. As the majority of these instruments are of a short-term nature, if interest rates were to increase or
decrease immediately, there is no material risk of a valuation adjustment related to these instruments. For those
instruments that are classified as available for sale, the unrealized gains or losses related to fluctuations in inter-
est rates are reflected in other accumulated comprehensive income or loss. Based on the Company’s cash and
cash equivalents and short-term investments balances at August 29, 2004, a 100 basis point increase or decrease
in interest rates would result in an increase or decrease of approximately $27,000 to interest income (pre-tax) on
an annual basis.
Most foreign currency transactions have been conducted in local currencies, limiting the Company’s ex-
posure to changes in currency rates. The Company periodically enters into short-term forward foreign exchange
contracts to hedge the impact of fluctuations in foreign currency rates on inventory purchases. The fair value of
foreign exchange contracts outstanding at August 29, 2004 was not material to the Company’s results of oper-
ations or its financial position.
Controls and Procedures
The Company carried out an evaluation as of August 29, 2004, under the supervision and with the partic-
ipation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective to timely alert them to any
material information relating to the Company (including its consolidated subsidiaries) that must be included in
the Company’s periodic Securities and Exchange Commission filings. There have been no significant changes in
the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to
their evaluation.
At the end of fiscal year 2005, Section 404 of the Sarbanes-Oxley Act will require management of the Com-
pany to provide in its annual report an assessment of the effectiveness of the Company’s internal controls over
financial reporting and the Company’s independent public accounting firm will be required to attest to manage-
ment’s assessment. The Company is in the process of performing the system and process documentation, evalua-
tion and testing required for management to make this assessment and for the auditors to provide its attestation
report. The Company has not completed this process or its assessment, and this process will require significant
amounts of management time and resources. In the course of evaluation and testing, management may identify
deficiencies that will need to be addressed and remediated.
Subsequent Event
Subsequent to fiscal year end the Company experienced some business interruption in its Florida locations
due to hurricane damage. With the exception of one warehouse, which closed September 25, 2004 and reopened
November 22, 2004, all other warehouses incurred only minor damage and minimal disruption to their oper-
ations. Overall, the Company expects to incur losses in the range of $5,000 to $7,000 net of insurance recoveries.
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