Costco 2008 Annual Report Download - page 40

principal is due in October 2017. The proceeds were used to repay the 2.070% Promissory Notes due
in October 2007 and for general corporate purposes.
In February 2007, we issued $900 million of 5.3% Senior Notes due March 15, 2012 at a discount of
$2.5 million and $1.1 billion of 5.5% Senior Notes due March 15, 2017 at a discount of $5.9 million
(together, the 2007 Senior Notes). Interest on the 2007 Senior Notes is payable semi-annually on
March 15 and September 15 of each year. The discount and issuance costs associated with the 2007
Senior Notes are being amortized to interest expense over the terms of those notes. At our option, we
may redeem the 2007 Senior Notes at any time, in whole or in part, at a redemption price plus accrued
interest. The redemption price is equal to the greater of 100% of the principal amount of the 2007
Senior Notes to be redeemed, or the sum of the present values of the remaining scheduled payments
of principal and interest to maturity. Additionally, we will be required to make an offer to purchase the
2007 Senior Notes at a price of 101% of the principal amount plus accrued and unpaid interest to the
date of repurchase, upon certain events as defined by the terms of the 2007 Senior Notes.
In April 2003, our wholly-owned Japanese subsidiary issued promissory notes bearing interest at
0.92% in the amount of $36.8 million, through a private placement. Interest is payable semi-annually
and principal is due in April 2010. In November 2002, our wholly-owned Japanese subsidiary issued
promissory notes bearing interest at 0.88% in the aggregate amount of $27.6 million, through a private
placement. Interest is payable semi-annually and principal is due in November 2009. The U.S. Parent
Company, Costco Wholesale Corporation guarantees all of the promissory notes issued by our wholly-
owned Japanese subsidiary.
In August 1997, we sold $900.0 million principal amount at maturity Zero Coupon Notes due in
August 2017. The Zero Coupon Notes were priced with a yield to maturity of 3.5%, resulting in gross
proceeds to us of $449.6 million. The notes outstanding are convertible into a maximum of 1.5 million
shares of Costco Common Stock shares at an initial conversion price of $22.71. Holders of the Zero
Coupon Notes may require us to purchase the Zero Coupon Notes (at the discounted issue price plus
accrued interest to date of purchase) in August 2012. We may redeem, at our option, the Zero Coupon
Notes (at the discounted issue price plus accrued interest to date of redemption) any time after
August 2002. As of August 31, 2008, $832.9 million in principal amount of the Zero Coupon Notes had
been converted by note holders to shares of Costco Common Stock, of which $0.5 million and $61.2
million in principal were converted in 2008 and 2007, respectively, or $0.4 million and $42.3 million in
2008 and 2007, respectively, after factoring in the related debt discount.
Derivatives
We follow Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative
Instruments and Hedging Activities (as amended)” (SFAS 133), in accounting for derivative and
hedging activities. We use derivative and hedging arrangements only to manage what we believe to be
well-defined risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of
foreign exchange on inventory purchases and typically have very short terms. These forward contracts
do not qualify for derivative hedge accounting. The aggregate notional amount of foreign exchange
contracts outstanding at the end of 2008 and 2007 was $89.8 million and $75.0 million, respectively.
The mark-to-market adjustment related to these contracts resulted in the recording of an asset of $4.6
million and a liability of $0.9 million at the end of 2008 and 2007, respectively, and $5.8 million and
$0.4 million were recognized in interest income and other in the consolidated statements of income in
2008 and 2007, respectively. The majority of the forward foreign exchange contracts were entered into
by our wholly-owned United Kingdom subsidiary, primarily to hedge U.S. dollar merchandise inventory
purchases.
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