Form 11-K
Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 11-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13(a) or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13(a) or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2003

 

Commission File Number

000-20355

 

Costco 401(k) Retirement Plan

999 Lake Drive

Issaquah, Washington 98027

(full title and address of plan)

 

Costco Wholesale Corporation

999 Lake Drive

Issaquah, Washington 98027

(Name of issuer and address of principal executive offices of issuer)

 


 


Table of Contents

INDEX

 

Report of Independent Registered Public Accounting Firm

  1

Financial Statements:

   

Statements of Net Assets Available for Plan Benefits as of December 31, 2003 and 2002

  2

Statements of Changes in Net Assets Available for Plan Benefits for the years ended December 31, 2003 and 2002

  3

Notes to Financial Statements

  4

Supplemental Information

   

Schedule H, Line 4i - Schedule of Assets (Held at End of Year) as of December 31, 2003

  9

Signature

   

Exhibit 23(a) – Consent of Independent Registered Public Accounting Firm

   

 


Table of Contents

COSTCO 401(k) RETIREMENT PLAN

 

Financial Statements and Schedule

 

December 31, 2003 and 2002

 

(With Report of Independent Registered Public Accounting Firm Thereon)

 


Table of Contents

COSTCO 401(k) RETIREMENT PLAN

 

Index

 

Report of Independent Registered Public Accounting Firm

  1

Financial Statements:

   

Statements of Net Assets Available for Plan Benefits as of December 31, 2003 and 2002

  2

Statements of Changes in Net Assets Available for Plan Benefits for the Years Ended December 31, 2003 and 2002

  3

Notes to Financial Statements

  4

Supplemental Information:

   

Schedule H, Line 4i – Schedule of Assets (Held at End of Year) as of December 31, 2003

  9

 


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Report of Independent Registered Public Accounting Firm

 

The Benefits Committee

Costco 401(k) Retirement Plan:

 

We have audited the accompanying statements of net assets available for plan benefits of the Costco 401(k) Retirement Plan (the “Plan”) as of December 31, 2003 and 2002, and the related statements of changes in net assets available for plan benefits for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for plan benefits of the Plan as of December 31, 2003 and 2002, and the changes in net assets available for plan benefits for the years then ended, in conformity with U.S. generally accepted accounting principles.

 

Our audits were performed for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of assets (held at end of year) is presented for the purpose of additional analysis and is not a required part of the basic financial statements but is supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule is the responsibility of the Plan’s management. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

 

/s/    KPMG LLP

 

Seattle, Washington

June 17, 2004

 


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COSTCO 401(k) RETIREMENT PLAN

 

Statements of Net Assets Available for Plan Benefits

 

December 31, 2003 and 2002

 

     2003

   2002

Assets:

             

Investments, at fair value:

             

Registered investment company funds:

             

American Growth Fund of America

   $ 20,120,545    $ 8,417,608

American New Perspective Fund

     23,813,312      11,705,868

Vanguard Asset Allocation Fund

     25,801,405      14,909,297

Davis New York Venture Fund

     36,960,889      21,662,078

Small Cap Stock Fund

     49,484,288      28,298,989

Spectrum Income Fund

     111,981,234      82,799,622

Mid-Cap Growth Fund

     142,975,819      82,497,834

Equity Index Fund

     60,638,236      36,045,830

International Stock Fund

     15,099,944      7,935,516

Common commingled trust fund:

             

Stable Value Fund

     422,122,372      359,641,027

Costco Wholesale Corporation common stock

     525,754,944      350,508,883

Participant loans

     82,443,478      69,875,287
    

  

Total investments

     1,517,196,466      1,074,297,839
    

  

Cash and cash equivalents

     1,442,538      174,176

Contributions receivable:

             

Employer

     93,558,545      81,221,615

Employee

          5,299,899
    

  

       93,558,545      86,521,514
    

  

Net assets available for plan benefits

   $ 1,612,197,549    $ 1,160,993,529
    

  

 

See accompanying notes to financial statements.

 

2


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COSTCO 401(k) RETIREMENT PLAN

 

Statements of Changes in Net Assets Available for Plan Benefits

 

Years Ended December 31, 2003 and 2002

 

     2003

    2002

 

Net investment income (loss):

                

Net appreciation (depreciation) in fair value of investments:

                

Shares of registered investment company funds

   $ 96,104,985     $ (49,264,175 )

Common stock

     128,244,434       (185,833,361 )

Interest

     5,646,939       5,215,045  

Dividends

     24,687,077       21,594,607  
    


 


Total net investment income (loss)

     254,683,435       (208,287,884 )
    


 


Contributions to the Plan:

                

Employee

     122,410,007       104,140,886  

Employer

     115,079,082       97,453,462  
    


 


Total contributions

     237,489,089       201,594,348  
    


 


Interplan transfer

     (4,858 )     135,950  

Plan merger

           61,048,872  

Distributions to participants

     (40,963,646 )     (38,195,239 )
    


 


Net increase in net assets available for plan benefits

     451,204,020       16,296,047  

Net assets available for plan benefits, beginning of year

     1,160,993,529       1,144,697,482  
    


 


Net assets available for plan benefits, end of year

   $ 1,612,197,549     $ 1,160,993,529  
    


 


 

See accompanying notes to financial statements.

 

3


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COSTCO 401(k) RETIREMENT PLAN

 

Notes to Financial Statements

 

December 31, 2003 and 2002

 

(1) Plan Description

 

The following description of the Costco 401(k) Retirement Plan (the “Plan”) provides only general information. Participants should refer to the plan document for a more complete description of the Plan’s provisions.

 

Participants in the Plan are employees of Costco Wholesale Corporation (the “Company”).

 

The Plan is a defined contribution plan established by the Company under the provisions of Section 401(a) of the Internal Revenue Code (the IRC), which includes a qualified cash or deferred arrangement as described in Section 401(k) of the IRC, for the benefit of eligible employees of the Company. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA), as amended.

 

The Costco 401(k) Plan for California Union Employees (the Union Plan) was merged into the Costco 401(k) Retirement Plan effective December 31, 2002.

 

  (a) Eligibility

 

The Plan allows certain employees over 18 years of age to make salary deferral contributions and receive matching contributions commencing the first day of the month following the completion of 90 days of employment. Participants are eligible for the Company’s discretionary contribution after completion of one year of service, 1,000 hours worked in the previous 12 months, and attaining the age of 18.

 

  (b) Employee Contributions

 

Each year, participants may contribute from 1% to 25% of their compensation before income taxes, subject to certain limitations set by the Internal Revenue Service (IRS). Participants may also contribute amounts representing distributions from other qualified benefit or contribution plans (known as rollover contributions).

 

  (c) Employer Contributions

 

All Company contributions are made in cash, and invested in accordance with investment selections already made by participants. If no selection has been made, the contribution is defaulted to the T. Rowe Price Stable Value Fund. Employer contributions are allocated based on an employee’s classification as either a California Union Employee or an Other than California Union Employee.

 

  (1) Other than California Union Employees

 

The Company matches 50% of the employee’s contribution, up to a maximum employer matching contribution of $500 per year.

 

The Company may also contribute a discretionary amount to the account of each participant who is employed by the Company on the last day of the plan year. The discretionary contribution ranged from 3% to 10% of compensation based on years of service and was approved for the years ended December 31, 2003 and 2002.

 

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COSTCO 401(k) RETIREMENT PLAN

 

Notes to Financial Statements

 

December 31, 2003 and 2002

 

  (2) California Union Employees

 

The Company matches 50% of the employee’s contribution, up to a maximum employer matching contribution of $250 per year.

 

The Company also makes a contribution to all plan participants (with five years of service or more) employed on the last day of the plan year based upon hours worked during the plan year, up to a maximum of 80 hours per pay period (bi-weekly). Participants who reach their fifth anniversary up to their ninth anniversary receive $0.20 per hour. Participants who reach or exceed their tenth anniversary receive $0.30 per hour.

 

  (d) Participants’ Accounts

 

Participants’ accounts are valued on a daily basis based on quoted market prices. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account.

 

  (e) Vesting

 

Participants are immediately vested in their contributions, plus actual earnings thereon. Vesting in the employer-matching and discretionary contributions is based on years of service, according to the following schedule:

 

Years of service


   Percentage
vested


 

Less than 2

   0 %

2-3

   20  

3-4

   40  

4-5

   60  

5 or more

   100  

 

  (f) Forfeitures

 

During 2003 and 2002, forfeitures of $2,000,000 and $1,200,000, respectively, were used to reduce the employer contributions to the Plan. Forfeitures without benefit of investment gains or losses can be restored to a participant’s account if the participant is re-employed by the Company prior to the expiration of five years of consecutive breaks in service and repays the full dollar amount distributed because of the termination within five years of the re-employment date. As of December 31, 2003 and 2002, forfeitures of approximately $2,287,285 and $2,804,808, respectively, had not been used to reduce employer contributions. These forfeitures will be used to offset future employer contributions.

 

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COSTCO 401(k) RETIREMENT PLAN

 

Notes to Financial Statements

 

December 31, 2003 and 2002

 

  (g) Investment Options

 

Upon enrollment in the Plan, a participant may direct his/her account balance into any of the investment options listed on the statements of net assets available for plan benefits. T. Rowe Price is the trustee for all investments, serves as investment manager for certain registered investment company and common commingled trust funds, and provides recordkeeping of all participant accounts. Amounts may be temporarily invested in a cash account prior to investment in Costco Wholesale Corporation common stock.

 

Participants may change their investment options and transfer amounts between funds daily.

 

  (h) Distributions

 

Upon termination of employment, total disability or death, the vested interest in a participant’s account is payable in a lump sum. Participants may apply for a distribution of all or a portion of the vested interest at any time after attainment of age 59-1/2. Participants are also eligible to make hardship withdrawals from their salary deferral contributions in the event of certain financial hardships. Following a hardship withdrawal, participants are not allowed to contribute to the Plan for a six-month period.

 

  (i) Participant Loans

 

A participant may borrow the lesser of $50,000 or 45% of his or her vested account balance, calculated using the participant’s pre-tax contribution, rollover, Company matching and Company discretionary contribution amounts. However, only the participant’s pre-tax contribution, rollover, and Company matching amounts are eligible to borrow against, with a minimum loan of $1,000. Loans are payable through payroll deductions over a period ranging up to 180 months, depending on the purpose of the loan. The interest rate is determined by the plan administrator based on Bank of America prime rate plus 1% for a primary residence loan and prime rate plus 2% for a standard loan on the last day of the calendar quarter in which the loan was made. The rates at December 31, 2003 and 2002 ranged from 5% to 11.5% and 5.75% to 11.5%, respectively. The loans have various maturity dates, through December 2018.

 

  (j) Plan Administrator

 

The Plan is administered by the Benefits Committee, which is appointed by the board of directors of the Company.

 

  (k) Administrative Expenses

 

All administrative and custodial fees of the Plan are paid by the Company. All investment management and transaction fees directly related to the plan investments are netted against net investment income.

 

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COSTCO 401(k) RETIREMENT PLAN

 

Notes to Financial Statements

 

December 31, 2003 and 2002

 

  (l) Interplan Transfers

 

Interplan transfers during 2003 represent the net amount of participant account balances transferred during the year to the Puerto Rico Plan from the Plan as a result of the participants’ changing employment within the Company and the related changes in their eligibility status. Interplan transfers during 2002 represent the net amount of participant account balances transferred during the year to the Plan from the Union Plan as a result of the participants’ changing employment within the Company and the related changes in their eligibility status.

 

(2) Significant Accounting Policies

 

  (a) Basis of Accounting

 

The financial statements of the Plan are prepared under the accrual method of accounting.

 

  (b) Use of Estimates

 

The preparation of financial statements requires the use of estimates. Actual results could differ from those estimates.

 

  (c) Investment Valuation and Income Recognition

 

Investments are stated at fair value. Registered investment company and common commingled trust funds, and Costco Wholesale Corporation common stock are valued based on quoted market prices. Participant loans are valued at cost which approximates fair value.

 

Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) in fair value of investments includes the change in the fair value of assets from one period to the next, and realized gains and losses.

 

The Plan invests in Company common stock and various registered investment company funds which in turn invest in a combination of stocks, bonds and other investment securities. Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of net assets available for plan benefits.

 

The Stable Value Fund is a common commingled trust fund investing primarily in guaranteed investment contracts (GICs) and synthetic GICs. The GICs are fully benefit responsive and are recorded at contract value, which approximates fair value. The effective yield of the fund was 4.74% and 5.63% for the years ended December 31, 2003 and 2002, respectively.

 

  (d) Payment of Benefits

 

Benefits are recorded when paid.

 

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COSTCO 401(k) RETIREMENT PLAN

 

Notes to Financial Statements

 

December 31, 2003 and 2002

 

(3) Plan Termination

 

Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA and the requirements of the collective bargaining agreement with the International Brotherhood of Teamsters in California. In the event of plan termination, participants will become 100% vested in their accounts.

 

(4) Tax Status

 

The IRS has informed the Company that the Plan is designed in accordance with applicable sections of the Internal Revenue Code. The Plan was amended subsequent to receiving a determination letter. The plan administrator believes that the Plan is designed and was being operated in compliance with the applicable requirements of the IRS.

 

(5) Party-in-Interest Transactions

 

Certain plan investments are shares of registered investment company funds managed by T. Rowe Price. T. Rowe Price is the trustee and recordkeeper as defined by the Plan, and therefore, these transactions qualify as party-in-interest transactions.

 

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Schedule I

 

COSTCO 401(k) RETIREMENT PLAN

 

Schedule H, Line 4i – Schedule of Assets (Held at End of Year)

 

December 31, 2003

 

Identity of issuer, borrower,

lessor, or similar party


  

Description of investment


  

Current

value


Registered investment company funds

           

American Funds

   Growth Fund of America    $ 20,120,545

American Funds

   New Perspective Fund      23,813,312

Vanguard

   Asset Allocation Fund      25,801,405

Davis Funds

   New York Venture Fund      36,960,889

* T. Rowe Price

   Small Cap Stock Fund      49,484,288

* T. Rowe Price

   Spectrum Income Fund      111,981,234

* T. Rowe Price

   Mid-Cap Growth Fund      142,975,819

* T. Rowe Price

   Equity Index Fund      60,638,236

* T. Rowe Price

   International Stock Fund      15,099,944

Common commingled trust fund

           

* T. Rowe Price

   Stable Value Fund      422,122,372

Common stock

           

* Costco Wholesale Corporation

   Common stock      525,754,944

Loans

           

* Various Participants

   Participant loans, with interest rates of      82,443,478
     5% to 11.5% maturing through December 2018       
         

          $ 1,517,196,466
         

 

* Indicates a party-in-interest.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized, on this 17th day of June, 2004.

 

Costco 401(k) Retirement Plan

By:   /s/    JOHN MATTHEWS        
   

John Matthews

Senior Vice President

Costco Wholesale Corporation