Costco 2003 Annual Report Download - page 42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data) (Continued)
Note 4—Leases
The Company leases land and/or warehouse buildings at 85 of the 397 warehouses open at August 31, 2003,
and certain other office and distribution facilities under operating leases with remaining terms ranging from 1 to
40 years. These leases generally contain one or more of the following options which the Company can exercise at
the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then fair market
rental rate; (b) purchase of the property at the then fair market value; or (c) right of first refusal in the event of a
third party purchase offer. Certain leases provide for periodic rental increases based on the price indices and
some of the leases provide for rents based on the greater of minimum guaranteed amounts or sales volume. Con-
tingent rents have not been material. The Company accounts for its leases with step-rent provisions on a straight-
line basis over the original term of the lease.
Additionally, the Company leases certain equipment and fixtures under short-term operating leases that
permit the Company to either renew for a series of one-year terms or to purchase the equipment at the then fair
market value.
Aggregate rental expense for fiscal 2003, 2002, and 2001, was $84,146, $69,894, and $70,394, respectively.
Future minimum payments, net of sub-lease income of $142,975, during the next five fiscal years and thereafter
under non-cancelable leases with terms in excess of one year, at August 31, 2003, were as follows:
2004 ............................................................ $ 85,862
2005 ............................................................ 86,654
2006 ............................................................ 87,342
2007 ............................................................ 82,540
2008 ............................................................ 79,561
Thereafter ....................................................... 983,303
Total minimum payments ....................................... $1,405,262
Note 5—Stock Options
The Company’s 1993 Combined Stock Grant and Stock Option Plan (the “1993 plan”) provided for the issu-
ance of up to 60 million shares of its common stock upon the exercise of stock options and up to
3,333,332 shares through stock grants. During fiscal 2002 the 2002 Stock Incentive Plan (the “2002 plan”) was
adopted following shareholder approval. The 2002 plan authorized 30 million shares of common stock for issu-
ance, subject to adjustment. For future grants, the 2002 plan replaces the 1993 plan and the 1993 plan has been
amended to provide that no more options or stock grants may be issued under such plan. Any shares under the
1993 plan that remain available for future option grants (and any additional shares that subsequently become
available through cancellation of unexercised options outstanding) will be added to the number of shares avail-
able for grant under the 2002 plan. The 2002 plan authorizes the Company to grant stock options to eligible em-
ployees, directors and consultants. Options granted under these plans have a ten-year term and a vesting period of
five years. At August 31, 2003, options for approximately 25.1 million shares were vested and 18.6 million
shares were available for future grants under the plan.
The Company adopted the fair value based method of recording stock options consistent with SFAS No. 123
“Accounting for Stock-Based Compensation,” for all employee stock options granted subsequent to fiscal year
end 2002 using the “prospective method.” All employee stock option grants made in fiscal 2003 and in future
years will be expensed over the stock option vesting period based on the fair value at the date the options are
granted. Prior to fiscal 2003 the Company applied APB No. 25 and related interpretations in accounting for stock
options. Because the Company granted stock options to employees at exercise prices equal to fair market value
on the date of grant, accordingly, no compensation cost was recognized for option grants.
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