Costco 2009 Annual Report Download - page 40

In October 2007, our wholly-owned Japanese subsidiary issued promissory notes through a private
placement in the amount of $69, bearing interest at 2.695%. Interest is payable semi-annually, and
principal is due in October 2017. The proceeds were used to repay the 2.07% Promissory Notes in
October 2007 and for general corporate purposes.
In February 2007, we issued $900 of 5.3% Senior Notes due March 15, 2012 at a discount of $2 and
$1,100 of 5.5% Senior Notes due March 15, 2017 at a discount of $6 (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 $43, 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 $32, 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 principal amount at maturity 3.5% Zero Coupon Convertible
Subordinated Notes (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 of $450. The current Zero Coupon Notes
outstanding are convertible into a maximum of 961,000 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. At our option, we may redeem the Zero Coupon Notes (at the discounted issue price plus
accrued interest to date of redemption) any time after August 2002. As of August 30, 2009, $858 in
principal amount of the Zero Coupon Notes had been converted by note holders to shares of Costco
Common Stock, of which $25, $1, and $61 in principal were converted in 2009, 2008, and 2007
respectively, or $19 and $42 in 2009 and 2007, respectively, after factoring in the related debt
discount. In 2008, the conversion of principle for Zero Coupon Notes after factoring the related debt
discount was not significant.
Derivatives
Effective November 24, 2008, we adopted the disclosure requirements of Statement of Financial
Accounting Standards (SFAS) No. 161, “Disclosures about Derivative Instruments and Hedging
Activities—an Amendment of Financial Accounting Standards Board (FASB) Statement No. 133”
(SFAS 161). We follow SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities
(as amended)” (SFAS 133), in accounting for derivative and hedging activities.
We are exposed to foreign currency exchange-rate fluctuations in the normal course of our business,
which we manage in part through the use of forward foreign exchange contracts, seeking to hedge the
impact of fluctuations of foreign exchange on known future expenditures denominated in a foreign
currency. The forward foreign exchange contracts are entered into primarily to hedge U.S. dollar
merchandise inventory expenditures. Currently, these instruments do not qualify for derivative hedge
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