Costco 2004 Annual Report Download - page 45

Note 4—Leases
The Company leases land and/or warehouse buildings at 91 of the 417 warehouses open at August 29, 2004,
and certain other office and distribution facilities under operating leases with remaining terms ranging from 1 to
44 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 2004, 2003, and 2002, was $95,800, $84,146, and $69,894, respectively.
Future minimum payments, net of sub-lease income of $148,339, during the next five fiscal years and thereafter
under non-cancelable leases with terms in excess of one year, at August 29, 2004, were as follows:
2005 ............................................................ $ 110,616
2006 ............................................................ 109,305
2007 ............................................................ 103,429
2008 ............................................................ 98,611
2009 ............................................................ 91,790
Thereafter ....................................................... 1,061,027
Totalminimumpayments ....................................... $1,574,778
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 fol-
lowing shareholder approval. The 2002 plan authorized 30 million shares of common stock for issuance, 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 available for grant under
the 2002 plan. The 2002 plan authorizes the Company to grant stock options to eligible employees, directors and
consultants. Options granted under these plans have a ten-year term and generally have a vesting period of five
years. At August 29, 2004, options for approximately 27.5 million shares were vested and 11.7 million shares
were available for future grants under the plan.
In fiscal 2004, 2003 and 2002 the Company recognized stock compensation costs of $36,508, $12,069 and
$0, respectively. The effects of applying SFAS No. 123 were substantially less in fiscal 2003 than the effects on
net income and earnings per share in fiscal 2004 and expected in future periods because this was the initial year
of adoption. Fiscal 2004 reflects compensation expense from options granted in that year, as well as continuing
recognition of expense associated with options issued in prior years as they vest. Shares granted in fiscal 2004
and 2003 totaled 7,780,924 and 8,479,550 shares, respectively, with the majority of these shares being granted in
the middle of the fiscal third quarter for both fiscal years.
Total stock compensation costs on a pre-tax basis that would have been recorded had SFAS No. 123 been
adopted as of its initial effective date would have totaled $92,679, $112,863 and $123,159 in fiscal 2004, 2003
and 2002, respectively.
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