Costco 1998 Annual Report Download - page 16

MERRILL CORPORATION NETWORK COMPOSITION SYSTEM BSANDFO // 1-DEC-98 23:38 DISK004:[98SEA7.98SEA2097]DM2097A.;7
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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
warehouses in Mexico and plans to open two or three new warehouse clubs during fiscal 1999, including
two prior to the 1998 calendar year-end.
Bank Credit Facilities and Commercial Paper Programs (all amounts stated in US dollars)
The Company has in place a $500,000 commercial paper program supported by a $500,000 bank credit
facility with a group of 9 banks, of which $250,000 expires on January 25, 1999, and $250,000 expires on
January 30, 2001. At August 30, 1998, no amounts were outstanding under the loan facility or the
commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $128,000 commercial paper program supported
by an $89,000 bank credit facility with three Canadian banks, which expires in March 1999. At August 30,
1998, no amounts were outstanding under the bank credit facility or the Canadian commercial paper
program.
The Company has agreed to limit the combined amount outstanding under the U.S. and Canadian
commercial paper programs to the $589,000 combined amounts of the respective supporting bank credit
facilities.
Letters of Credit
The Company has separate letter of credit facilities (for commercial and standby letters of credit),
totaling approximately $317,000. The outstanding commitments under these facilities at August 30, 1998
totaled approximately $212,000, including approximately $50,000 in standby letters of credit for workers’
compensation requirements.
Derivatives
The Company has limited involvement with derivative financial instruments and uses them only to
manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used
to hedge the impact of fluctuations of foreign exchange on inventory purchases. The amount of interest
rate and foreign exchange contracts outstanding at the 52 weeks ended August 30, 1998 were not material
to the Company’s results of operations or its financial position.
Year 2000
The Company uses a number of computer software programs and embedded operating systems that
were not originally designed to process dates beyond the year 1999. Like most automated companies,
Costco is addressing the Year 2000 challenge to make sure all of its systems are Year 2000 compliant and
fully operational prior to the year 2000 and on into the 21st Century. As far back as the early 1990’s, the
Company began taking initial measures to ensure that its systems would function in the year 2000 and
beyond. The Company anticipates completing testing for all key systems by early calendar year 1999, and
believes that the Year 2000 issues will not present any significant operational problems. Total costs related
to the year 2000 effort are estimated to be less than $5,000, of which approximately 75% has been incurred
by the Company through August 30, 1998. While it is possible that systems currently being reviewed and/or
tested may produce an unexpected cost increase, the Company does not believe it would add materially to
the current estimate.
Additionally, the Company has contacted and will continue to contact significant vendors, suppliers,
financial institutions and other third party providers upon which its business depends. These efforts are
designed to minimize the impact to the Company should these third parties fail to remediate their Year
2000 issues. However, the Company can give no assurances that such third parties will in fact be successful
in resolving all of their Year 2000 issues, and the failure of such third parties to comply on a timely basis
could have an adverse effect on the Company. The Company anticipates minimal business disruption as a
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