Costco 2010 Annual Report Download - page 38

In June 2008, our Japanese subsidiary entered into a ten-year term loan in the amount of $35, with a
variable rate of interest of Yen TIBOR (6-month) plus a 0.35% margin (0.84% and 0.95% at the end of
2010 and 2009, respectively) on the outstanding balance. Interest is payable semi-annually in December
and June and principal is due in June 2018.
In October 2007, our Japanese subsidiary issued promissory notes through a private placement in the
amount of $77, bearing interest at 2.695%. Interest is payable semi-annually, and principal is due in
October 2017. We guarantee all of the promissory notes issued by our Japanese subsidiary.
In February 2007, we issued $900 of 5.3% Senior Notes due March 15, 2012 (2012 Notes) at a discount
of $2 and $1,100 of 5.5% Senior Notes due March 15, 2017 (2017 Notes) 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 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 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 to the Company of $450. The remaining Zero Coupon Notes
outstanding are convertible into a maximum of 943,000 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 29, 2010, $859 in principal
amount of Zero Coupon Notes had been converted by note holders to shares of Costco Common Stock,
of which the principal converted during 2010, 2009 and 2008 is detailed in the table below:
2010 2009 2008
Principal converted during period ............................ $ 1 $ 25 $ 1
Principal converted, including the related debt discount .......... $ 1 $ 19 $ 0
Shares issued upon conversion (000’s) ....................... 18 562 13
Derivatives
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 contracts are intended primarily to hedge U.S. dollar merchandise inventory expenditures.
Currently, these contracts do not qualify for derivative hedge accounting. We seek to mitigate risk with the
use of these contracts and do not intend to engage in speculative transactions. These contracts do not
contain any credit-risk-related contingent features.
We seek to manage the counterparty risk associated with these contracts by limiting transactions to
counterparties with which we have established banking relationships. There can be no assurance,
however, that this practice effectively mitigates counterparty risk. The contracts are limited to less than
one year. See Note 1 and Note 3 to the consolidated financial statements included in Part II, Item 8 of this
Report, for additional information related to these contracts.
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