Costco 2005 Annual Report Download - page 55

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 102 of the 433 warehouses open at August 28,
2005, and certain other office and distribution facilities under operating leases with remaining terms ranging
from 1 to 42 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 in-
dices and some of the leases provide for rents based on the greater of minimum guaranteed amounts or sales vol-
ume. Contingent 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 2005, 2004 and 2003 was $131,690, $113,681 and $103,134, re-
spectively. The amount for 2005 excludes $15,999 in rent expense associated with the correction made in the
second quarter of fiscal 2005 to the Company’s method of accounting for ground leases that did not require rental
payments during the period of construction. Future minimum payments, net of sub-lease income of $168,742 for
all years combined, during the next five fiscal years and thereafter under non-cancelable leases with terms of at
least one year, at August 28, 2005, were as follows:
2006 .................................................................... $ 114,682
2007 .................................................................... 111,638
2008 .................................................................... 107,764
2009 .................................................................... 100,332
2010 .................................................................... 88,856
Thereafter ............................................................... 1,038,995
Totalminimumpayments ............................................... $1,562,267
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. During fiscal 2005 the 2002 plan was amended and is now referred to as the Amended and Restated
2002 Stock Incentive Plan following shareholder approval. The Amended and Restated 2002 plan authorized the
issuance of an additional 10 million shares for option grants and authorized the award of stock bonuses or stock
units in addition to stock option grants currently authorized. The number of shares issued as stock bonuses or
stock units is limited to one-third of those available for option grants. Options granted under these plans have a
ten-year term and generally have a vesting period of five years. At August 28, 2005, options for approximately
26.0 million shares were vested and 11.5 million shares were available for future grants under the plan.
54