-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RobzIYdcqxr+Yu4K4J3/VUn69hkON4EkxyqOvtotlX7JXV8SdLWUu6+KrHnQgDnk NOcjQlDN2Fai0bDlSYI+xw== 0000060667-98-000007.txt : 19980428 0000060667-98-000007.hdr.sgml : 19980428 ACCESSION NUMBER: 0000060667-98-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980130 FILED AS OF DATE: 19980427 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOWES COMPANIES INC CENTRAL INDEX KEY: 0000060667 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 560578072 STATE OF INCORPORATION: NC FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07898 FILM NUMBER: 98601883 BUSINESS ADDRESS: STREET 1: PO BOX 1111 CITY: NORTH WILKESBORO STATE: NC ZIP: 28656 BUSINESS PHONE: 3366584000 MAIL ADDRESS: STREET 1: PO BOX 1111 CITY: NORTH WILKESBORO STATE: NC ZIP: 28656 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended January 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 1-7898 LOWE'S COMPANIES, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0578072 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) P. 0. BOX 1111, NORTH WILKESBORO, N.C. 28656-0001 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (336) 658-4000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock $.50 Par Value New York Stock Exchange Pacific Stock Exchange The Stock Exchange (London) Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x , No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant as of April 3, 1998: $9,262,752,152. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class: COMMON STOCK, $.50 PAR VALUE, Outstanding at April 3, 1998: 175,583,890 shares. Documents Incorporated by Reference Annual Report to Security Holders for fiscal year ended January 30, 1998: Parts I and II. With the exception of specifically referenced information, the Annual Report to Security Holders for the fiscal year ended January 30, 1998 is not to be deemed filed as part of this report. Proxy Statement for Annual Meeting filed April 17, 1998: Part III. Part I Item 1 - Business Reference is made to "Company Profile" on inside front cover, the Letter to shareholders on pages 1 - 3, "Lowe's Total Market Potential" on page 11, "Lowe's Stores" on page 12 and "Merchandise Sales Trends" on page 12 of the Annual Report to Security Holders for fiscal year ended January 30, 1998. Item 2 - Properties At January 30, 1998, the Company operated 446 stores with a total of 36.5 million square feet of selling space. The current prototype large store is a 101,000 square foot sales floor unit for smaller markets and a 115,000 square foot sales floor unit for medium and larger markets, each with a lawn and garden center comprising approximately 34,000 additional square feet. The Company also operates four distribution centers and ten smaller support facilities, four of which are reload centers only for lumber and building commodities. Reference is also made to the "Lowe's Stores" map and table on page 12 and to Notes 1, 3, 5 and 9 on pages 26, 27, 28 and 31 of the Annual Report to Security Holders for fiscal year ended January 30, 1998. Item 3 - Legal Proceedings Reference is made to Note 12 on page 32 of the Annual Report to Security Holders for fiscal year ended January 30, 1998. Item 4 - Submission of Matters to a Vote of Security Holders Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 29, 1998. The following is a list of names and ages of all of the executive officers of the registrant indicating all positions and offices with the registrant held by each such person and each person's principal occupations or employment during the past five years. Robert L. Tillman, 54 Chairman of the Board since 1998 and President and Chief Executive Officer since 1996; Senior Executive Vice President and Chief Operating Officer, 1994-1996; Executive Vice President, Merchandising, 1991-1994. Gregory M Bridgeford, 43 Senior Vice President and General Merchandise Manager since 1996; Vice President and General Merchandise Manager, 1994 - 1996; Vice President, Merchandising, 1989 - 1994. Richard D. Elledge, 56 Senior Vice President and Chief Accounting Officer since 1996; Vice President and Chief Accounting Officer, 1981 - 1996; Assistant Secretary since 1991. Lee Herring, 44 Senior Vice President, Logistics since 1996; Vice President, Logistics, 1993 - 1996; Vice President, Merchandising, 1985 - 1993. William L. Irons, 54 Senior Vice President, Management Information Services since 1992. W. Cliff Oxford, 46 Senior Vice President, Corporate and Human Development since 1996; Senior Vice President, Corporate Relations, 1994 - 1996; Vice President, Corporate Relations, 1984 - 1994. William D. Pelon, 48 Senior Vice President, Store Operations since 1997; Regional Vice President, Store Operations, 1995 - 1997; Senior Director, Sales Communications in 1995; District Manager, 1991 - 1995. Dale C. Pond, 52 Senior Vice President, Marketing since 1993; Senior Vice President, Marketing and New Business Development, Home Quarters Warehouse, Inc., 1991 - 1993. David E. Shelton, 51 Senior Vice President, Real Estate/Engineering and Construction since 1997; Vice President, Store Operations, 1995 - 1997; Vice President, Sales Operations, 1992 - 1995. Larry D. Stone, 46 Executive Vice President and Chief Operating Officer since 1997; Executive Vice President, Store Operations 1996 - 1997; Senior Vice President, Sales Operations, 1995 - 1996; Vice President, General Merchandising, 1992 - 1995. William C. Warden, Jr., 45 Executive Vice President, General Counsel, Chief Administrative Officer and Secretary since 1996; Senior Vice President, General Counsel and Secretary, 1993 - 1996; Assistant Secretary 1985 - 1993; Partner, McElwee, McElwee & Warden which served as General Counsel for the Company, 1979 - 1993. Gregory J. Wessling, 46 Senior Vice President and General Merchandise Manager since 1996; Vice President and General Merchandise Manager, 1994 - 1996; Vice President, Merchandising, 1989 - 1994. Thomas E. Whiddon, 45 Executive Vice President and Chief Financial Officer since 1996; Senior Vice President and Chief Financial Officer, 1995 - 1996 and Senior Vice President and Treasurer, 1994 - 1995, Zale Corporation; Vice President and Treasurer, 1988 - 1994, Eckerd Corporation. Part II Item 5 - Market for the Registrant's Common Stock and Related Security Holder Matters. The principal market for trading in Lowe's common stock is the New York Stock Exchange, Inc. (NYSE). Lowe's common stock is also listed on the Pacific Exchange in the United States and the Stock Exchange in London. The ticker symbol for Lowe's is LOW. As of January 30, 1998, there were 11,334 holders of record of Lowe's common stock. The table, "Lowe's Quarterly Stock Price Range and Cash Dividends", on page 34 of the Annual Report to Security Holders for fiscal year ended January 30, 1998 sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported by the NYSE Composite Tape, and the dividends per share declared on the common stock during such periods. Reference is also made to Note 8 beginning on page 29 of the Annual Report to Security Holders for fiscal year ended January 30, 1998. Item 6 - Selected Financial Data Reference is made to page 33 of the Annual Report to Security Holders for fiscal year ended January 30, 1998. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 18 through 20 and to "Disclosure Regarding Forward-Looking Statements" on page 16 of the Annual Report to Security Holders for fiscal year ended January 30, 1998. Item 7a -Quantitative and Qualitative Disclosures About Market Risk Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 19 and 20 of the Annual Report to Security Holders for fiscal year ended January 30, 1998. Item 8 - Financial Statements and Supplementary Data Reference is made to the "Independent Auditors' Report" on page 17 and to the financial statements and notes thereto on pages 22 through 32, and to the "Selected Quarterly Data" on page 33 of the Annual Report to Security Holders for fiscal year ended January 30, 1998. Item 9 - Disagreements on Accounting and Financial Disclosure Not applicable. Part III Item 10 - Directors and Executive Officers of the Registrant Reference is made to "Lowe's Board of Directors" on pages 14 and 15 of the Annual Report to Security Holders for fiscal year ended January 30, 1998, and to Part I - Executive Officers of the Registrant. Item 11 - Executive Compensation Reference is made to "Compensation of Executive Officers", "Option/SAR Grants in Last Fiscal Year", "Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-end Option/SAR Values", and "Long-term Incentive Plans - Awards in Last Fiscal Year" included in the definitive Proxy Statement which was filed, pursuant to regulation 14A with the SEC on April 17, 1998, and which sections are hereby incorporated by reference. Information included under the captions "Report of the Compensation Committee" and "Performance Graph" is not incorporated by reference herein. Item 12 - Security Ownership of Certain Beneficial Owners and Management Reference is made to "Security Ownership of Certain Beneficial Owners and Management" included in the definitive Proxy Statement which was filed pursuant to regulation 14A, with the SEC on April 17, 1998, and is hereby incorporated by reference. Item 13 - Certain Relationships and Related Transactions Reference is made to "Information About the Board of Directors and Committees of the Board" included in the definitive Proxy Statement which was filed, pursuant to regulation 14A, with the SEC on April 17,1998, and is hereby incorporated by reference. Part IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K a) 1.Financial Statements Reference is made to the following items and page numbers appearing in the Annual Report to Security Holders for fiscal year ended January 30, 1998: Pages Independent Auditors' Report 17 Consolidated Statements of Earnings for each of the three fiscal years in the period ended January 30, 1998 22 Consolidated Balance Sheets at January 30, 1998 and January 31, 1997 23 Consolidated Statements of Shareholders' Equity for each of the three fiscal years in the period ended January 30, 1998 24 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 30, 1998 25 Notes to Consolidated Financial Statements for each of the three fiscal years in the period ended January 30, 1998 26-32 2.Financial Statement Schedules Schedules are omitted because of the absence of conditions under which they are required or because information required is included in financial statements or the notes thereto. 3.Exhibits (3.1) Restated and Amended Charter (filed as Exhibit 3 to the Company's Form 10-Q dated December 12,1997 and incorporated by reference herein). (3.2) Bylaws, as amended. (4.1) Rights Agreement dated as of September 9, 1988 between the Company and Wachovia Bank and Trust Co., N.A., as Rights Agent (filed as Exhibit 4.1 to the Company's Form 8-K dated September 9, 1988 and incorporated by reference herein). (10.1) Lowe's Companies, Inc. 1985 Stock Option Plan (filed as Exhibit C to the Company's Proxy Statement dated May 31, 1985 and incorporated by reference herein). (10.2) Post Effective Amendment No. 1 to Lowe's Companies, Inc. 1985 Stock Option Plan (filed on the Company's Form S-8 dated June 23, 1987 (No. 33-2618) and incorporated by reference herein). (10.3) Lowe's Companies, Inc. 1989 Non-Employee Directors' Stock Option Plan (filed as Exhibit A to the Company's Proxy Statement dated June 9, 1989 and incorporated by reference herein). (10.4) Lowe's Companies, Inc. 1990 Benefit Restoration Plan (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended January 31, 1991, and incorporated by reference herein). (10.5) Indenture dated April 15, 1992 between the Company and Chemical Bank, as Trustee (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (No. 33-47269) and incorporated by reference herein). (10.6) Lowe's Companies, Inc. Director's Stock Incentive Plan (filed on the Company's Form S-8 dated July 8, 1994 (No. 33-54497) and incorporated by reference herein). (10.7) Lowe's Companies, Inc. 1994 Incentive Plan (filed on the Company's Form S-8 dated July 8, 1994 (No. 33-54499) and incorporated by reference herein). (10.8) Amended and Restated Indenture, dated as of December 1, 1995, between the Company and First National Bank of Chicago, as Trustee (filed as Exhibit 4.1 on Form 8-K dated December 15, 1995, and incorporated by reference herein). (10.9) Form of the Company's 6 3/8 % Senior Note due December 15, 2005 (filed as Exhibit 4.2 on Form 8-K dated December 15, 1995, and incorporated by reference herein). (10.10) Lowe's Companies, Inc. 1997 Incentive Plan (filed on the Company's Form S-8 dated August 29, 1997 (No. 333-34631) and incorporated by reference herein). (10.11) Form of the Company's 6 7/8 % Debenture due February 20, 2028 (filed as Exhibit 4.2 on Form 8-K dated February 20, 1998, and incorporated by reference herein). (13) Annual Report to Security Holders for fiscal year ended January 30, 1998. (21) List of Subsidiaries. (23) Consent of Deloitte & Touche LLP (27) Financial Data Schedule b) Reports on Form 8-K There were no reports on Form 8-K filed by the registrant during the last quarter of the period covered by this report. Part IV SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Lowe's Companies, Inc._____ April 24, 1998 By: /s/ Thomas E. Whiddon______ Date Thomas E. Whiddon Executive Vice President and Chief Financial Officer April 24, 1998 By: /s/ Kenneth W. Black, Jr.____ Date Kenneth W. Black, Jr. Vice President and Corporate Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Chairman of the Board of Directors, President, Chief Executive Officer /s/Robert L. Tillman and Director 4/24/98 Robert L. Tillman Date /s/Robert L. Strickland Director 4/24/98 Robert L. Strickland Date ______________________ Director _______ William A. Andres Date /s/ John M. Belk Director 4/24/98 John M. Belk Date /s/ Leonard L. Berry__ Director 4/24/98 Leonard L. Berry Date ____________________ Director _______ Peter C. Browning Date ____________________ Director _______ Carol A. Farmer Date ____________________ Director _______ Paul Fulton Date ____________________ Director _______ James F. Halpin Date /s/ Leonard G. Herring Director 4/24/98 Leonard G. Herring Date /s/ Richard K. Lochridge Director 4/24/98 Richard K. Lochridge Date /s/ Claudine B. Malone Director 4/24/98 Claudine B. Malone Date ______________________ Director _______ Robert G. Schwartz Date EX-3 2 EXHIBIT 3.2 BYLAWS OF LOWE'S COMPANIES, INC. As Amended and Restated March 1, 1998 INDEX ARTICLE I. OFFICES 1 ARTICLE II. SHAREHOLDERS 1 SECTION 1. ANNUAL MEETING 1 SECTION 2. SPECIAL MEETINGS 1 SECTION 3. PLACE OF MEETING 1 SECTION 4. NOTICE OF MEETING 2 SECTION 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE 2 SECTION 6. VOTING LISTS 2 SECTION 7. QUORUM 3 SECTION 8. PROXIES 3 SECTION 9. VOTING OF SHARES 3 SECTION 10. CONDUCT OF MEETINGS 3 ARTICLE III. BOARD OF DIRECTORS 5 SECTION 1. GENERAL POWERS 5 SECTION 2. NUMBER, TENURE AND QUALIFICATIONS 5 SECTION 3. FOUNDING DIRECTOR 5 SECTION 4. DIRECTOR EMERITUS 5 SECTION 5. QUARTERLY MEETINGS 5 SECTION 6. SPECIAL MEETINGS 5 SECTION 7. NOTICE 6 SECTION 8. QUORUM 6 SECTION 9. MANNER OF ACTING 6 SECTION 10. VACANCIES 6 SECTION 11. COMPENSATION 6 SECTION 12. PRESUMPTION OF ASSENT 6 SECTION 13. ACTION WITHOUT MEETING 6 SECTION 14. INFORMAL ACTION BY DIRECTORS 7 SECTION 15. COMMITTEES GENERALLY 7 SECTION 16. EXECUTIVE COMMITTEE 7 SECTION 17. AUDIT COMMITTEE 8 SECTION 18. COMPENSATION COMMITTEE 8 SECTION 19. GOVERNANCE COMMITTEE 8 SECTION 20. GOVERNMENT/LEGAL AFFAIRS COMMITTEE 8 SECTION 21. SALARY ADMINISTRATION; DIRECTORS COMPENSATION 9 ARTICLE IV. INDEMNIFICATION 9 SECTION 1. INDEMNIFICATION 9 SECTION 2. LIMITATION ON INDEMNIFICATION 9 SECTION 3. BOARD DETERMINATION 9 SECTION 4. RELIANCE 9 SECTION 5. AGENTS AND EMPLOYEES 10 SECTION 6. EXPENSES 10 SECTION 7. INSURANCE 10 ARTICLE V. OFFICERS 10 SECTION 1. TITLES 10 SECTION 2. ELECTION AND TERM OF OFFICE 10 SECTION 3. REMOVAL 10 SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS 11 SECTION 5. VICE CHAIRMEN OF THE BOARD OF DIRECTORS 11 SECTION 6. PRESIDENT 11 SECTION 7. VICE PRESIDENTS 11 SECTION 8. SECRETARY 11 SECTION 9. TREASURER 11 SECTION 10. CONTROLLER 11 ARTICLE VI. DEPARTMENTAL DESIGNATIONS 11 SECTION 1. DEPARTMENTAL DESIGNATIONS 11 ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER 12 SECTION 1. CERTIFICATES FOR SHARES 12 SECTION 2. TRANSFER OF SHARES 12 SECTION 3. LOST CERTIFICATES 12 ARTICLE VIII. FISCAL YEAR 13 ARTICLE IX. DIVIDENDS 13 ARTICLE X. SEAL 13 ARTICLE XI. WAIVER OF NOTICE 13 ARTICLE XII. AMENDMENTS 13 ii BYLAWS OF LOWE'S COMPANIES, INC. As Amended and Restated March 1, 1998 ARTICLE I. OFFICES The principal and registered office of the corporation in the State of North Carolina shall be located in the City of North Wilkesboro, County of Wilkes. The corporation may have such other offices either within or without the State of North Carolina, as the Board of Directors may designate or the business of the corporation may require from time to time. ARTICLE II. SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders shall be held on the last Friday in the month of May in each year, at an hour to be designated by the Chairman of the Board, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. The meeting shall be held on the following business day at the same time in the event the last Friday in May shall be a legal holiday. If the annual meeting shall not be held on the day designated by this Section 1, a substitute annual meeting shall be called in accordance with the provisions of Section 2 of this Article II. A meeting so called shall be designated and treated for all purposes as the annual meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes may be called by the Chairman of the Board or by a majority of the Board of Directors. SECTION 3. PLACE OF MEETING. The Board of Directors may designate any place, either within or without the State of North Carolina, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. In the event the directors do not designate the place of meeting for either an annual or special meeting of the shareholders, the Chairman of the Board may designate the place of meeting. If the Chairman of the Board does not designate the place of meeting, the meeting shall be held at the offices of the corporation in North Wilkesboro, North Carolina. 1 SECTION 4. NOTICE OF MEETING. Written notice stating the place, day, and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than 10 nor more than 60 days before the day of the meeting, by mail, by or at the direction of the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. Such notice, when mailed, shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. When a meeting is adjourned it shall not be necessary to give any notice of the adjourned meeting other than by announcement at the meeting at which the adjournment is taken unless a new record date for the adjourned meeting is or must be fixed, in which event notice shall be given to shareholders as of the new record date. SECTION 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at the meeting or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, 60 days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least 10 days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 70 days and, in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or of shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 5, such determination shall apply to any adjournment thereof if the meeting is adjourned to a date not more than 120 days after the date fixed for the original meeting. SECTION 6. VOTING LISTS. The officer or agent having charge of the stock transfer books for shares of the corporation shall make before each meeting of shareholders a complete list of the shareholders entitled to vote at such meeting arranged in alphabetical order and by voting group (and within each voting group by class or series of shares), with the address of and the number of shares held by each. For a period beginning two business days after notice of the meeting is given and continuing through the meeting, this list shall be available at the corporation's principal office for inspection by any shareholder at any time during usual business hours. The list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection 2 of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote any meeting of shareholders. SECTION 7. QUORUM. Shares entitled to vote as a separate voting group may take action on a matter at a meeting if a quorum of that voting group exists with respect to that matter. In the absence of a quorum at the opening of any meeting of shareholders, the meeting may be adjourned from time to time by the vote of the majority of the votes cast on the motion to adjourn. A majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. Once a share is represented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of the meeting unless a new record date is or must be set for the adjourned meeting. If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation, a Bylaw adopted by the shareholders, or the North Carolina Business Corporation Act requires a greater number of affirmative votes. SECTION 8. PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution, unless otherwise provided in the proxy. If a proxy for the same shares confers authority upon two or more persons and does not otherwise provide a majority of them present at the meeting or if only one is present at the meeting then that one may exercise all the powers conferred by the proxy; but if the proxy holders present at the meeting are divided as to the right and manner of voting in any particular case, and there is no majority, the voting of such shares shall be prorated. SECTION 9. VOTING OF SHARES. Except as otherwise provided by law, each outstanding share of capital stock of the corporation entitled to vote shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. The vote of a majority of the shares voted on any matter at a meeting of shareholders at which a quorum is present shall be the act of the shareholders on that matter, unless the vote of a greater number is required by law or by the Articles of Incorporation or Bylaws. Voting on all substantive matters shall be by a ballot vote on that particular matter. Voting on procedural matters shall be by voice vote or by a show of hands unless the holders of one-tenth of the shares represented at the meeting shall demand a ballot vote on procedural matters. SECTION 10. CONDUCT OF MEETINGS. At each meeting of the stockholders, the Chairman of the Board shall act as chairman and preside. In his absence, the Chairman of the Board may designate another officer or director to preside. The Secretary or an Assistant Secretary, or in their absence, a person whom the Chairman of such meeting shall appoint, shall act as secretary of the meeting. 3 At any meeting of stockholders, only business that is properly brought before the meeting may be presented to and acted upon by stockholders. To be properly brought before the meeting, business must be brought (a) by or at the direction of the Board of Directors or (b) by a stockholder who has given written notice of business he expects to bring before the meeting to the Secretary not less than 15 days prior to the meeting. If mailed, such notice shall be sent by certified mail, return receipt requested, and shall be deemed to have been given when received by the Secretary. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the corporation's stock beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. No business shall be conducted at a meeting of stockholders except in accordance with the procedures set forth in this Section 10. The chairman of a meeting of stockholders shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 10, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Any nomination for director made by a stockholder must be made in writing to the Secretary not less than 15 days prior to the meeting of stockholders at which Directors are to be elected. If mailed, such notice shall be sent by certified mail, return receipt requested, and shall be deemed to have been given when received by the Secretary. A stockholder's nomination for director shall set forth (a) the name and business address of the stockholder's nominee, (b) the fact that the nominee has consented to his name being placed in nomination, (c) the name and address, as they appear on the corporation's books, of the stockholder making the nomination, (d) the class and number of shares of the corporation's stock beneficially owned by the stockholder, and (e) any material interest of the stockholder in the proposed nomination. Notwithstanding compliance with this Section 10, the chairman of a meeting of stockholders may rule out of order any business brought before the meeting that is not a proper matter for stockholder consideration. This Section 10 shall not limit the right of stockholders to speak at meetings of stockholders on matters germane to the corporation's business, subject to any rules for the orderly conduct of the meeting imposed by the Chairman of the meeting. The corporation shall not have any obligation to communicate with stockholders regarding any business or director nomination submitted by a stockholder in accordance with this Section 10 unless otherwise required by law. 4 ARTICLE III. BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed by the Board of Directors except as otherwise provided by law, by the Articles of Incorporation or by the Bylaws. SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors of the Corporation shall be 13, divided into three classes: Class I, (five), Class II, (four), and Class III, (four). One director shall be designated and elected by the Board as Chairman of the Board of Directors, and shall preside at all meetings of the Board of Directors. The Board may elect a Vice-Chairman whose only duties shall be to preside at Board meetings in the absence of the Chairman. Directors need not be residents of the State of North Carolina or shareholders of the corporation. Subject to the Articles of Incorporation, the Board of Directors shall each year, prior to the annual meeting, determine by appropriate resolution the number of directors which shall constitute the Board of Directors for the ensuing year, and the number of directors which shall constitute the class of directors being elected at such annual meeting. The directors may amend the Bylaws between meetings of shareholders to increase or decrease the number of directors to make vacancies available for the election of new directors. SECTION 3. FOUNDING DIRECTOR. A Founding Director is a person who Was a director when it became a public company in 1961, who was a director on November 7, 1980, and who has served continuously as a director since 1961. SECTION 4. DIRECTOR EMERITUS. A Director Emeritus is a person with prior service as a Founding Director. The Board of Directors may designate a Founding Director as a Director Emeritus. The Director Emeritus annual lifetime benefit is 50% of the Founding Director's director compensation in effect at the time the Founding Director (whether an Employee Director or a Non-Employee Director) becomes a Director Emeritus. SECTION 5. QUARTERLY MEETINGS. Quarterly meetings of the Board of Directors shall be held at a time and place determined by the Chairman of the Board of Directors. Any one or more of the directors or members of a committee designated by the directors may participate in a meeting of the Board or committee by means of a conference telephone or similar communications device which allows all persons participating in the meeting to hear each other and such participation in a meeting will be deemed presence in person. SECTION 6. SPECIAL MEETINGS. Special Meetings of the Board of Directors may be called by or at the request of the Chairman of the Board of Directors or two of the directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of North Carolina, as the place for holding any special meeting of the Board of Directors called by them. 5 SECTION 7. NOTICE. Notice of any special meeting shall be given by either mail, facsimile or telephone. Notice of any special meeting given by mail shall be given at least five days previous thereto. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail properly addressed, with postage thereon prepaid. If notice is given by facsimile or by telephone, it shall be done so at least two days prior to the special meeting and shall be deemed given at the time the facsimile is transmitted or of the telephone call itself. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 8. QUORUM. A majority of the number of directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. SECTION 9. MANNER OF ACTING. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless otherwise required by the Articles of Incorporation. SECTION 10. VACANCIES. Any vacancy occurring in the Board of Directors shall be filled as provided in the Articles of Incorporation. SECTION 11. COMPENSATION. The directors may be paid such expenses as Are incurred in connection with their duties as directors. The Board of Directors may also pay to the directors compensation for their service as directors. SECTION 12. PRESUMPTION OF ASSENT. A director of the corporation who Is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 13. ACTION WITHOUT MEETING. Action taken by a majority of the Board, or a Committee thereof, without a meeting is nevertheless Board, or Committee, action if written consent to the action in question is signed by all of the directors, or Committee members, and filed with the minutes of the proceedings of the Board, or Committee, whether done before or after the action so taken. 6 SECTION 14. INFORMAL ACTION BY DIRECTORS. Action taken by a majority of the directors without a meeting is action of the Board of Directors if written consent to the action is signed by all of the directors and filed with the minutes of the proceedings of the Board of Directors, whether done before or after the action so taken. SECTION 15. COMMITTEES GENERALLY. Committees of the Board of Directors shall be reestablished annually at the first Board of Directors Meeting held subsequent to the Annual Shareholders Meeting. Directors designated to serve on committees shall serve as members of such committees until the first Board of Directors Meeting following the next succeeding Annual Shareholders Meeting or until their successors shall have been duly designated. The Board of Directors may designate a committee chairman and a committee vice chairman from the membership for each committee established. In the absence of the designation of a committee chairman or vice chairman by the Board, a committee by majority vote may elect a chairman or vice chairman from its own membership. SECTION 16. EXECUTIVE COMMITTEE. (a) The Board may establish an Executive Committee comprising not less than three members. This Committee may exercise all of the authority of the Board of Directors to the full extent permitted by law, but shall not have power: i) To declare dividends or authorize distributions; ii) To approve or propose to shareholders any action that is required to be approved by shareholders under the North Carolina Business Corporation Act; iii) To approve an amendment to the Articles of Incorporation of the Corporation; iv) To approve a plan of dissolution; merger or consolidation; v) To approve the sale, lease or exchange of all or substantially all of the property of the Corporation; vi) To designate any other committee, or to fill vacancies in the Board of Directors or other committees; vii) To fix the compensation of directors for serving on the Board of Directors or any committee; viii) To amend or repeal the Bylaws, or adopt new Bylaws; ix) To authorize or approve reacquisition of shares, except according to a formula or method approved by the Board of Directors; 7 x) To authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, unless the Board of Directors specifically authorizes the Executive Committee to do so within limits established by the Board of Directors; xi) To amend, or repeal any resolution of the Board of Directors which by its terms is not so amendable or repealable; or xii) To take any action expressly prohibited in a resolution of the Board of Directors. SECTION 17. AUDIT COMMITTEE. The Board may establish an Audit Committee comprising not less than three members, all of whom shall be non-employee directors. The Committee shall aid the Board in carrying out its responsibilities for accurate and informative financial reporting, shall assist the Board in making recommendations with respect to management's efforts to maintain and improve financial controls, shall review reports of examination by the independent auditors, and except as otherwise required by law, shall have authority to act for the Board in any matter delegated to this Committee by the Board of Directors. The Committee shall recommend each year an independent certified public accounting firm as independent auditors for the Corporation. The Corporation's Head of Internal Audit shall report to the Audit Committee, and his employment may only be terminated with the approval of the Committee. SECTION 18. COMPENSATION COMMITTEE. The Board may establish a Compensation Committee comprising not less than three members, all of whom shall be non-employee directors. Except as otherwise required by law, the Compensation Committee shall have authority to act for the Board in any matter delegated to this Committee by the Board of Directors. SECTION 19. GOVERNANCE COMMITTEE. The Board may establish a Governance Committee comprising not less than three members, all of whom shall be non-employee directors. Except as otherwise required by law, the Governance Committee shall have authority to act for the Board in any matter delegated to this Committee by the Board of Directors. SECTION 20. GOVERNMENT/LEGAL AFFAIRS COMMITTEE. The Board may establish a Government/Legal Affairs Committee to consist of not less than three directors. Except as otherwise required by law, the Government/Legal Affairs Committee shall have authority to act for the Board in any manner delegated to this Committee by the Board of Directors. 8 SECTION 21. SALARY ADMINISTRATION; DIRECTORS COMPENSATION. The compensation of employees not covered by the Compensation Committee duties shall be the responsibility of the Chief Executive Officer. The compensation of independent directors shall be recommended to the Board of Directors by the Chief Executive Officer. ARTICLE IV. INDEMNIFICATION SECTION 1. INDEMNIFICATION. In addition to any indemnification required or permitted by law, and except as otherwise provided in these Bylaws, any person who at any time serves or has served as a director or officer of the corporation, or in such capacity at the request of the corporation for any other corporation, partnership, joint venture, trust or other enterprise, shall have a right to be indemnified by the corporation to the fullest extent permitted by law against (i) reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, seeking to hold him liable by reason of the fact that he is or was acting in such capacity, and (ii) payments made by him in satisfaction of any judgment, money decree, fine, penalty or reasonable settlement for which he may have become liable in any such action, suit or proceeding. SECTION 2. LIMITATION ON INDEMNIFICATION. The corporation shall not indemnify any person hereunder against liability or litigation expense he may incur on account of his activities which were at the time taken known or believed by him to be clearly in conflict with the best interests of the corporation. The corporation shall not indemnify any director with respect to any liability arising out of N.C.G.S. Section 55-8-33 (relating to unlawful declaration of dividends) or any transaction from which the director derived an improper personal benefit as provided in N.C.G.S. Section 55-2-02(b)(3). SECTION 3. BOARD DETERMINATION. If any action is necessary or appropriate to authorize the corporation to pay the indemnification required by this Bylaw the Board of Directors shall take such action, including (i) making a good faith evaluation of the manner in which the claimant for indemnity acted and of the reasonable amount of indemnify due him, (ii) giving notice to, and obtaining approval by, the shareholders of the corporation, and (iii) taking any other action. SECTION 4. RELIANCE. Any person who at any time after the adoption of this Bylaw serves or has served in any of the capacities indicated in this Bylaw shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the right of indemnification provided herein. Such right shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from the provision of this Bylaw. 9 SECTION 5. AGENTS AND EMPLOYEES. The provisions of this Bylaw shall not be deemed to preclude the corporation from indemnifying persons serving as agents or employees of the corporation, or in such capacity at the request of the corporation for any other corporation, partnership, joint venture, trust or other enterprise, to the extent permitted by law. SECTION 6. EXPENSES. The corporation shall be entitled to pay the expenses incurred by a director or officer in defending a civil or criminal action, suit or proceeding in advance of final disposition upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation against such expenses. SECTION 7. INSURANCE. As provided by N.C.G.S. Section 55-8-57, the Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or who is or was serving at the request of the corporation as a director, officer or employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation has the power to indemnify him against such liability. ARTICLE V. OFFICERS SECTION 1. TITLES. The officers of the corporation may consist of the Chairman of the Board of Directors, Vice Chairmen, the President, and such Vice Presidents as shall be elected as officers by the Board of Directors. There shall also be a Secretary, Treasurer, Controller and such assistants thereto as may be elected by the Board of Directors. Any one person may hold one or more offices in the corporation. No officer may act in more than one capacity where action of two or more is required. SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the corporation shall be elected annually by the Board of Directors at the first meeting of the Board held after each annual meeting of the shareholders, or at any other meeting of said Board. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 3. REMOVAL. Since officers serve at the pleasure of the Board, any officer may be removed at any time by the Board of Directors, with or without cause. Termination of an officer's employment with the Corporation by the appropriate official (and by the Audit Committee for the Head of Internal Audit) shall also end his term as an officer. 10 SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS. There shall be a Chairman of the Board of Directors elected by the directors from their members. The Chairman shall preside at meetings of the Board of Directors, shall be the Chief Executive Officer of the corporation, and shall have direct supervision and control of all of the business affairs of the corporation, subject to the general supervision and control of the Board of Directors. The Chairman shall have power to sign certificates for shares of the corporation and any deeds, mortgages, bonds, contracts, or any other instruments or documents which may be lawfully executed on behalf of the corporation. The Chairman shall vote as agent for the corporation the capital stock held or owned by the corporation in any corporation. The Chairman is authorized to delegate the authority to vote capital stock held or owned by the corporation and to execute and deliver agreements and other instruments to other officers of the corporation. SECTION 5. VICE CHAIRMEN OF THE BOARD OF DIRECTORS. The Board of Directors may elect one or more Vice Chairmen from their members. A Vice Chairman shall preside at meetings of the Board of Directors in the absence of the Chairman. SECTION 6. PRESIDENT. The President perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. SECTION 7. VICE PRESIDENTS. The Vice Presidents shall perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. SECTION 8. SECRETARY. The Secretary shall perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. SECTION 9. TREASURER. The Treasurer shall perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. SECTION 10. CONTROLLER. The Controller shall perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. ARTICLE VI. DEPARTMENTAL DESIGNATIONS SECTION 1. DEPARTMENTAL DESIGNATIONS. The Chief Executive Officer may establish such departmental or functional designations or titles pertaining to supervisory personnel as the Chief Executive Officer in his discretion deems wise. The designations or titles may be that of Senior Vice President, Vice President or such other term or terms as the Chief Executive Officer desires to utilize. The designation or title 11 contemplated by this section is for the purpose of administration within the department or function concerned and is not with the intent of designating those individuals bearing such titles as general officers of the corporation. These individuals bearing these titles shall be known as administrative managers of the corporation. ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of the corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the Chairman of the Board and by the Secretary, provided that where a certificate is signed by a transfer agent, assistant transfer agent or co-transfer agent of the corporation or with the duly designated transfer agent the signatures of such officers of the corporation upon the certificate may be by facsimile engraved or printed. Each certificate shall be sealed with the seal of the corporation or a facsimile thereof. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and class and date of issue, shall be entered on the stock transfer books of the corporation, as the transfer agent. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe. SECTION 2. TRANSFER OF SHARES. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of records thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. To the extent that any provision of the Rights Agreement between the Company and Wachovia Bank and Trust Company, N.A., Rights Agent, dated as of September 9, 1988, is deemed to constitute a restriction on the transfer of any securities of the Company, including, without limitation, the Rights, as defined therein, such restriction is hereby authorized by the Bylaws of the Company. SECTION 3. LOST CERTIFICATES. The Board of Directors may authorize the issuance of a new certificate in place of a certificate claimed to have been lost or destroyed, upon receipt of an affidavit of such fact from the person claiming the loss or destruction. In authorizing such issuance of a new certificate, the Board may require the claimant to give the corporation a bond in such sum as it may direct to indemnify the corporation against loss from any claim with respect to the certificate claimed to have been lost or destroyed; or the Board, by resolution reciting that the circumstances justify such action, may authorize the 12 issuance of the new certificate without requiring such a bond. This function or duty on the part of the Board may be assigned by the Board to the transfer agents of the common stock of the corporation. ARTICLE VIII. FISCAL YEAR The fiscal year of the Corporation shall end on the Friday nearest to January 31 of each year. The fiscal year shall consist of four quarterly periods, each comprising 13 weeks, with the 13-week periods divided into three periods of four weeks, five weeks, and four weeks. Every six to eight years, the fiscal year shall be a 53-week year, with the fourth period comprising four weeks, five weeks, and five weeks, to reflect the 365th day of each year and the 29th day of February in leap year. ARTICLE IX. DIVIDENDS The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and as provided in a resolution of the Board of Directors. ARTICLE X. SEAL The Board of Directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the corporation, the state of incorporation, and the word "Seal". ARTICLE XI. WAIVER OF NOTICE Whenever any notice is required to be given to any shareholder or director of the corporation under the provisions of the charter or under the provisions of applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE XII. AMENDMENTS Unless otherwise prescribed by law or the charter, these Bylaws may be amended or altered at any meeting of the Board of Directors by affirmative vote of a majority of the directors. Unless otherwise prescribed by law or the charter, the shareholders entitled to vote in respect of the election of directors, however, shall have the power to rescind, amend, alter or repeal any Bylaws and to enact Bylaws which, if expressly so provided, may not be amended, altered or repealed by the Board of Directors. 13 EX-13 3 EXHIBIT 13 Inside front cover: Company Profile Lowe's Companies, Inc. is one of America's 25 largest retailers and a Fortune 200 company serving the home improvement, home decor, and home construction markets from approximately 450 stores located primarily in the eastern half of the United States. At the beginning of 1998, our employees numbered nearly 60,000 and our retail sales space totaled approximately 36.5 million square feet. Lowe's has been selected by Fortune magazine as one of the "100 Best Companies to Work For in America" and is the only home improvement retailer to receive that distinction. In late 1997 we proudly announced our commitment as a Gold Sponsor to the 1999 Special Olympics World Summer Games. The 10th Special Olympics World Games will be the largest sporting event in the world in 1999. Our goal is to provide all visiting athletes, coaches, volunteers, families and friends a memorable and enriching life experience. Lowe's has been a publicly held company since October 10, 1961. Our stock is listed on the New York Stock Exchange, the Pacific Stock Exchange, and the London Stock Exchange with shares trading under the ticker symbol LOW. Pages 1 - 3: To Our Shareholders In 1997, Lowe's got better at what we do well. We served more than thirty million customers, ringing up 200 million transactions. We topped $10 billion in sales and achieved record earnings of $357 million. In addition, during our 51st year we dedicated ourselves to acquiring a comprehensive understanding of our increasingly diverse customer base. As a result, we are now better able to provide the superior customer satisfaction that is essential to Lowe's continued growth and prosperity. The Nineties have been a great platform from which to launch Lowe's into the new millennium. In this decade, so far, we have achieved a 20% compound sales growth rate and a 26% compound growth rate in net earnings. Those results have kept pace with the increase in our total square footage as we have transformed Lowe's into a chain of large home improvement warehouses. Although Lowe's has been around for half a century, 75% of our square footage is less than four years old. At the end of 1997 we had 289 large stores (80,000 square feet and larger) which accounted for 85% of our total 36.5 million square feet of selling space. We have been completing new store projects (including relocations) at a rate of more than one per week. In 1997 we opened 42 new stores in new markets, taking Lowe's product assortment, customer service and great prices to millions of new customers. We also completed 24 "re-Lowe-cations," continuing the transformation that has yielded immediate sales and earnings growth from relocated stores. We have opened four state-of-the-art regional distribution centers (RDC's) within the last four years, and a fifth is currently under construction. Every Lowe's store is now served by one of these high- tech, high-velocity RDC's, and we're ready to leverage our investment. We have refined our inventory and distribution systems so that we can get products to our customers faster while reducing costs. As our expansion continues, we are leveraging our RDC's by taking Lowe's into selected metropolitan markets. New stores in Atlanta, Dallas, Jacksonville, and Tampa met with enthusiastic customer acceptance in 1997. Our 1998 expansion will include between 75 and 80 new store projects, of which nearly 40% will be relocations of existing stores. Metro markets will be the target of more than half of Lowe's new market expansion over the next eighteen months, as we penetrate and aggressively develop metro areas with proximity to our RDC's. Taking care of customers is our mandate and our mission. It sounds simple, but to get the job done we are using increasingly sophisticated methods of analysis, forecasting, and planning. Through our own research, as well as from prognosticators such as Yankelovich, Peters, Nesbitt, and the Home Improvement Research Institute, we have identified trends that seem destined to have a profound effect on Lowe's and our industry as we enter the next millennium. Of course, predicting the future is always a gamble, but it beats closing your eyes and hoping it will go away. And you can significantly better your odds by doing your homework. Homework begins at home, so last year we intercepted more than 8,000 customers at the end of a Lowe's shopping experience and asked them to complete a comprehensive questionnaire. Their responses showed us where Lowe's is in tune with their evolving needs and desires, and where we could be serving them better. Another highly effective source of customer feedback has been Lowe's Gold Advisory Board. Gold Card holders are customers who have earned a substantial credit line and shop our stores frequently. At least once every month, we randomly select a market and invite a group of these special customers to join a Lowe's district manager and members of top management, including myself, for dinner. What we have learned in these sessions has confirmed and augmented our other research. There is great opportunity out there if we have the vision to identify trends, the wisdom to understand them, and the intellectual and financial capital to exploit them. America is getting older. Not only are we living longer in better health, but Baby Boomers are pulling the age curve upward as they cross the half-century mark. With increasing age and affluence, consumers are less likely to be do- it-yourselfers and more inclined to delegate projects to those with professional skills and tools. Replacing windows or installing a new floor is not how some may choose to spend their valuable free time. They will hire professionals for lawn care, pest control, pool maintenance, and furnace and air conditioner servicing. This indicates a realignment in the patterns of product distribution. We see it as an opportunity. Since 1950, the majority of the U.S. population has been female, but their current purchasing clout is a more recent development. Roughly half of the shoppers in Lowe's stores are female--and many male shoppers are influenced by women. Women initiate the majority of home improvement projects. They decide where to shop, and once inside the store they make virtually all the home decor decisions. They are also capable of carrying out projects themselves: the "Honey-Do" lists of yesteryear are simply "To-Do" lists today. Yet most of our industry's stores, packaging, staffing, advertising, and merchandising is targeted at men. We see this as another opportunity. How are we responding to these opportunities? The initiatives that we are planning and implementing are detailed in the feature article which follows this letter, but in brief: we are focused on providing service and value as defined by our customers, as well as supplying an unsurpassed assortment at unbeatable prices in all product categories. Our customers value solutions, and they like us to make things easy for them. That's why our strategic focus for 1998 includes greatly enhanced programs for special orders and installed sales. We are expanding our home decor offering to help customers achieve the look they want in every detail. We are building trust in Lowe's through high-quality, exclusive brands such as Top ChoiceTM Lumber. We are paying particular attention to commercial business customers, that group of professionals to whom the Baby Boomers are delegating so many home projects. We are also making our stores more productive through traffic-sensitive staffing schedules and improved systems for ordering and delivery. We have recently added new expertise and perspective to our board of directors. Dr. Leonard Berry heads the Center for Retailing Studies at Texas A&M University and is an authority on services marketing; Peter Browning is President and COO of Sonoco, the global packaging company; and Richard Lochridge is a management consultant with experience helping companies to identify and seize opportunities for growth and development. As we welcome these experienced business leaders to our board, we also express our gratitude and appreciation to two outstanding board members who retired in 1997. Pete Kulynych was one of Lowe's founding directors and is now a director emeritus; Senator Russell Long, long-time chairman of the U.S. Senate Finance Committee, served on Lowe's board for ten years. At the end of January 1998, Bob Strickland retired as Chairman of the Board of Directors. Bob was a member of Lowe's first management team, joining the Company in 1957 and serving on the Executive Committee and in the Office of the President before becoming chairman in 1978. We look forward to his continuing contribution as a member of the board. Lowe's retailing sector is growing. In the past fifteen years, our industry has grown at a compound annual rate of 6.5%, from $55 billion to $142 billion. According to the Home Improvement Research Institute, growth is expected to continue at roughly 5% per year. We are the second largest player in our fragmented sector, where in 1997 the top three competitors still only accounted for roughly one quarter of total industry sales. We see a tremendous opportunity to win market share as the trend toward consolidation continues. With our sharpened customer focus, we are confident that Lowe's is going where our customers want us to be. And putting customers first is good news for Lowe's shareholders, whose stake in Lowe's will also be customer driven. Best wishes, /s/Robert L. Tillman Robert L. Tillman Chairman of the Board, President and Chief Executive Officer April 24, 1998 Pages 14 and 15: Lowe's Board of Directors Robert L. Tillman, Chairman Director since 1994, age 54. Chairman of the Board since January 1998, President and Chief Executive Officer since August 1996, having previously served as Senior Executive Vice President and Chief Operating Officer (1994- July 1996) and Executive Vice President-Merchandising (1991-1994), Chairman of Executive Committee of the Company. Other directorships: International Mass Retail Association, Arlington, Va., since 1996. William A. Andres Director since 1986, age 71. Chairman of Governance Committee, Member of Compensation Committee and Executive Committee of the Company. Previously Chairman of the Board and Chief Executive Officer (1976-1983), Chairman of Executive Committee (1983-1985) of Dayton Hudson Corporation (Retail Chain), Minneapolis, Minn. (Mr. Andres retired in September 1985.) John M. Belk Director since 1986, age 78. Chairman of Audit Committee, Member of Governance Committee of the Company. Chairman of the Board, Belk Stores Services, Inc. (Retail Department Stores), Charlotte, N.C., since 1980. Other directorships: Coca-Cola Bottling Company Consolidated, Charlotte, N.C., since 1972; Chaparral Steel, Midlothian, Tex., since 1987. Leonard L. Berry, Ph.D. Director since 1998, age 55. Member of Audit Committee and Governance Committee of the Company. Professor of Marketing, Holder of the J.C. Penney Chair in Retailing Studies, and Director of the Center for Retailing Studies, Texas A&M University, College Station, Tex., since 1982. Other directorships: CompUSA Inc., Dallas, Tex., since 1993; Hastings Entertainment, Inc., Amarillo, Tex., since 1994; Council of Better Business Bureaus (Public Member), Arlinqton, Va., since 1995. Peter C. Browning Director since 1998, age 56. Member of Compensation Committee and Governance Committee of the Company. President and Chief Operating Officer, Sonoco Products Company (Global Packaging Company), Hartsville, S.C., since 1996 having previously served as Executive Vice-President (1993-1996) of that company; Director since 1995. Other directorships: Phoenix Home Life Mutual Ins. Co., Hartford, Conn., since 1989; Wachovia Corporation, Winston-Salem, N.C. since 1997. Carol A. Farmer Director since 1994, age 53. Member of Compensation Committee and Governance Committee of the Company. President, Carol Farmer Associates, Inc. (Trend Forecasting and Consulting), Boca Raton, Fla., since 1985. Other directorships: The Sports Authority, Inc., Ft. Lauderdale. Fla., since 1995. Paul Fulton Director since 1996, age 63. Member of Compensation Committee and Governance Committee of the Company. Chairman and Chief Executive Officer, Bassett Furniture Industries, Bassett, Va., since 1997; Director since 1993. Dean, Kenan-Flagler Business School, University of North Carolina, Chapel Hill, N.C., 1994-1997. President, Sara Lee Corporation (Manufacturer and Marketer of Consumer Products), Chicago, Ill., 1988-1993. Other directorships: Sonoco Products Company, Hartsville, S.C., since 1989; NationsBank Corporation, Charlotte, N.C., since 1993; The Cato Corporation, Charlotte, N.C., since 1994; Hudson Bay Company, Toronto, Ontario, since 1997. James F. Halpin Director since 1996, age 47. Member of Compensation Committee, Executive Committee and Governance Committee of the Company. President and Chief Executive Officer, CompUSA Inc. (Computer Superstores), Dallas, Tex. since 1993; President, HomeBase (Home Improvement Retail Chain), Irvine, Cal., 1990-1993. Other directorships: Interphase Corporation, Dallas, Tex., since 1995: Invincible Technologies Corp., Boston, Mass., since 1995; ToyBiz, Inc., New York, N.Y., since 1995. Leonard G. Herring Director since 1956, age 70. President and Chief Executive Officer 1978-July 1996, (Mr. Herring resigned as President and CEO effective August 1,1996 and retired as an employee of the Company January 31,1997), Member of Audit Committee and Executive Committee of the Company. Richard K. Lochridge Director since 1998, age 54. Member of Audit Committee and Governance Committee of the Company. President and Chief Executive Officer, Lochridge & Company (General Management Consulting Firm), Boston, Mass. since 1986. Other directorships: Dynatech Corporation, Burlington, Mass., since 1986; Hannaford Brothers Co., Portland, Me., since 1993. Claudine B. Malone Director since 1995, age 61. Member of Audit Committee and Governance Committee of the Company. President and Chief Executive Officer, Financial & Management Consulting, Inc., McLean, Va., since 1984. Other directorships: Chairman, Federal Reserve Bank, Richmond, Va., since 1996 (Member since 1994); Dell Computer Corporation, Austin, Tex., since 1993; Hannaford Bros., Scarborough, Me., since 1991; Hasbro, Inc., Pawtucket, R.I., since 1992; Houghton Mifflin, Boston, Mass., since 1982; LaFarge Corporation, Reston, Va., since 1994; The Limited, Inc., Columbus, Oh., since 1982; Mallinckrodt Group Inc., St. Louis, Mo., since 1994; SAIC-Science Applications International Corporation, San Diego, Cal., since 1993; Union Pacific Resources Corporation, Fort Worth, Tex., since 1995. Robert G. Schwartz Director since 1973, age 70. Chairman of Compensation Committee, Member of Governance Committee of the Company. Director of Metropolitan Life Insurance Company, New York, N.Y., since 1980, having previously served as Chairman of the Board (1983-1993), President and Chief Executive Officer (1989-1993) of that company. (Mr. Schwartz retired in March 1993.) Other directorships: Potlatch Corporation, Spokane, Wash., since 1973; Comsat Corporation, Bethesda, Md., since 1986; Mobil Corporation, Fairfax, Va. since 1987; The Reader's Digest Association, Inc., Pleasantville, N.Y., since 1989; Consolidated Edison Company of New York, New York, N.Y., since 1989; Lone Star Industries, Inc., Stamford, Conn., since 1994; Ascent Entertainment Group, Inc., Denver, Colo., since 1995. Robert L. Strickland Director since 1961, age 67. Chairman of the Board 1978-January 1998, (Mr. Strickland retired as an employee of the Company effective January 30, 1998), Member of Audit Committee and Executive Committee of the Company. Other directorships: Deputy Chairman, Federal Reserve Bank, Richmond, Va., since 1996; T. Rowe Price Associates, Inc., Baltimore, Md., since 1991; Hannaford Bros., Scarborough, Me., since 1994. Page 16: Disclosure Regarding Forward-Looking Statements This Annual Report includes "forward-looking statements " within the meaning of Section 27A of the Securities Act and Section 21 E of the Exchange Act. All statements other than statements of historical facts included in the Annual Report, including certain statements in the "Shareholders' Letter," "How Can We Help You Today?" "Looking Back on the Year 2000," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and located elsewhere herein regarding the Company's financial position and business strategy, may constitute forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations (cautionary statements) are: * The Company's sales are dependent on the general economic health of the country, variations in the number of new housing starts, the level of repairs, remodeling and additions to existing homes, commercial building activity, and the availability and cost of financing. An economic downturn can adversely affect sales because much of the Company's products are purchased by consumers for discretionary projects, which can readily be deferred. * The Company's expansion strategy may be impacted by environmental regulations, local zoning issues and delays, and more stringent land use regulations than it has traditionally experienced. * Many of the Company's products are commodities whose price fluctuates erratically within an economic cycle, a condition especially true with respect to lumber and plywood. * The Company's business is highly competitive, and as it expands to larger metropolitan markets the Company may face new forms of competition which do not exist in markets it has traditionally served. * The ability of the Company to continue its everyday competitive pricing strategy and provide the products that consumers desire depends on the vendor community providing a reliable supply of inventory at competitive prices. * On a short-term basis, inclement weather may impact sales performance of certain product groups such as lawn and garden, lumber, and building materials. Page 17 Independent Auditors' Report To the Board of Directors and Shareholders of Lowe's Companies, Inc. We have audited the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries as of January 30, 1998 and January 31, 1997, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three fiscal years in the period ended January 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Lowe's Companies, Inc. and subsidiaries at January 30, 1998 and January 31, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 30, 1998 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Charlotte, North Carolina February 19, 1998 Pages 18 - 20 Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion summarizes the significant factors affecting the Company's consolidated operating results and liquidity and capital resources during the three-year period ended January 30, 1998 (i.e., fiscal 1997, 1996 and 1995). This discussion should be read in conjunction with the Letter to Shareholders, financial statements and financial statement footnotes included in this annual report. Net earnings for 1997 increased 22% to $357.5 million or 3.5% of sales compared to $292.2 million or 3.4% of sales for 1996. Return on beginning assets was 8.1% compared to 8.2% for 1996; and return on beginning shareholders' equity was 16.1% compared to 17.6% for 1996. This decrease in return on equity resulted primarily from an increase in equity during 1996 due to the conversion of outstanding convertible debt to common stock. OPERATIONS The Company's sales were $10.1 billion during 1997, an 18% increase over 1996 sales of $8.6 billion. Sales for 1996 were 22% higher than 1995 levels. Comparable store sales increased 4% in 1997. Large store (stores exceeding 80,000 square feet) comparable sales increased 6% for the year. The increases in sales are attributable to the Company's store expansion and relocation program and comparable store sales growth. Comparable store sales increases are driven by the Company's continued strategy of employing an expanded inventory assortment, everyday competitive prices and an emphasis on customer service. The following table presents sales and store information: Fiscal 1997 1996 1995 Sales (in millions) $10,137 $8,600 $7,075 Sales Increases 18% 22% 16% Comparable Store Sales Increases 4% 7% - At end of year: Stores 446 402 365 Sales Floor Square Feet (in millions) 36.5 30.4 24.0 Average Store Size Square Feet (in thousands) 82 76 66 Gross margin in 1997 increased to 26.5% from 25.9% in 1996. Both of these years were an improvement over the 24.9% posted in 1995. Adherence to careful pricing disciplines in the execution of the Company's everyday competitive pricing strategy continued to provide margin improvements. Also, changes in product mix resulting from the expanded merchandise selection available in larger stores has contributed to the improvements in gross margin. Additionally, the Company reduced its exposure in lower margin consumer electronics in 1996 replacing these items with less seasonal, stronger margin products. The Company recorded a LIFO credit of $7.0 million in 1997, compared to charges of $1.4 million and $8.3 million for 1996 and 1995, increasing gross margin for 1997 by 6 basis points, and decreasing gross margin for 1996 and 1995 by 1 and 12 basis points, respectively. Selling, General and Administrative (SG&A) expenses for 1997 were $1.7 billion or 16.6% of sales. SG&A in the two previous years was 16.2% and 15.9% of sales. The 1997 increase of 40 basis points primarily resulted from higher payroll levels at stores that were new or relocated and increased costs relating to relocating or closing stores. The 1996 increase of 30 basis points primarily resulted from higher payroll levels at new or relocated stores and from the full achievement of annual bonus performance goals by management in 1996 compared to partial achievement in 1995. The Company has completed a comprehensive analysis of the impact and costs relating to the year 2000 system conversions and has developed an implementation plan to address the issue. The impact of the conversions is not expected to have a significant effect on the Company's results of operations and the related costs are not estimated to be material. Store opening costs were $70.0 million for 1997. These costs were $59.2 and $49.6 million for 1996 and 1995, respectively, and were expensed as incurred. As a percentage of sales, store opening costs were 0.7% for each of the three years presented. These costs averaged approximately $1 million per store during 1997. Depreciation, reflecting continued fixed asset expansion, increased 22% to $241 million, compared to increases of 32% and 37% for 1996 and 1995, respectively. Depreciation as a percentage of sales increased slightly to 2.4% in 1997 from 2.3% in 1996 and 2.1% in 1995. Approximately 43% of new stores opened in the last three years were leased, of which approximately 30%, 93% and 64% in 1997, 1996 and 1995 were under capital leases. Property, less accumulated depreciation, increased to $3.01 billion at January 30, 1998 compared to $2.49 billion at January 31, 1997. The increase in property resulted primarily from the Company's expansion program, including land, building, store equipment, fixtures and displays and investment in new distribution facilities. Employee retirement plan expense for 1997 was $72 million or 0.7% to sales. This cost is consistent with 0.8% for 1996 and 0.7% for 1995. Interest costs as a percent of sales were 0.6% for 1997 and 1996, compared to 0.5% for 1995. Interest totaled $66 million in 1997, $49 million in 1996 and $38 million for 1995. Interest costs related to capital leases totaled $38.3, $29.1 and $16.9 million for 1997, 1996 and 1995, respectively. See the discussion below on liquidity and capital resources. Effective income tax rates were 36.0%, 35.6% and 35.8% in 1997, 1996 and 1995, respectively. The higher rate in 1997 was primarily due to available tax credits not growing at the same rate as earnings and from expansion into states with higher tax rates. The lower rate in 1996 was primarily due to utilization of available state net operating losses. LIQUIDITY AND CAPITAL RESOURCES Primary sources of liquidity are cash flows from operating activities and certain financing activities. Net cash provided by operating activities was $664.9 million for 1997. This compared to $543.0 and $303.3 million for 1996 and 1995, respectively. The increases in net cash provided by operating activities for 1997 and 1996 are primarily related to increased earnings and smaller increases in inventory net of accounts payable from year to year. An increase in other operating liabilities also contributed to the 1996 increase in net cash provided by operations from 1995. Working capital at January 30, 1998 was $660.3 million compared to $502.9 million at January 31, 1997. Cash flows provided by financing activities were $221.8, $11.9 and $58.2 million in 1997, 1996 and 1995, respectively. The major cash components of financing activities in 1997 included issuance of $268 million aggregate principal amount of Medium Term Notes (MTN's) and $32.8 million of scheduled debt repayments. In 1996, financing activities primarily included proceeds from $64 million in short-term borrowings and $17.7 million of scheduled debt repayments. The major financing activity of 1996 was the noncash conversion of $284.7 million principal amount of 3% Convertible Subordinated Notes into common stock. In 1995, the Company issued $100 million aggregate principal amount of 6.375% Senior Notes and had scheduled debt repayments of $25.1 million. The ratio of long-term debt to equity plus long-term debt was 28.7%, 25.7% and 34.3% for 1997, 1996 and 1995, respectively. The increase in the debt to equity ratio in 1997 was primarily due to the issuance of the $268 million in MTN's mentioned earlier. The decrease in 1996 was primarily a result of the conversion of debt to equity. During 1997, the Company authorized the issuance of up to $350 million of MTN's. At January 30, 1998, the Company had sold $268 million aggregate principal of MTN's to investors with final maturities ranging from September 1, 2007 to May 15, 2037, at interest rates ranging from 6.07% to 7.61%. Approximately 37% of these MTN's may be put to the Company at the option of the holder on either the tenth or twentieth anniversary date of the issue. On February 9, 1998, the Company issued $300 million of 6.875% Debentures due February 15, 2028. The debentures may not be redeemed prior to maturity. The primary component of net cash used in investing activities continues to be new store facilities in connection with the Company's expansion plan. Cash acquisitions of fixed assets were $773, $677 and $520 million in 1997, 1996 and 1995, respectively. Financing and investing activities also include noncash transactions of capital leases for new store facilities and equipment, the result of which is to increase long-term debt and property. During 1997, 1996 and 1995, the Company acquired fixed assets (primarily new store facilities) under capital leases of $32.7, $182.7 and $96.9 million, respectively. At January 30, 1998, the Company has a $300 million revolving credit facility with a syndicate of ten banks, available lines of credit aggregating $206 million for the purpose of issuing documentary letters of credit and standby letters of credit and $80 million available, on an unsecured basis, for the purpose of short-term borrowings on a bid basis from various banks. At January 30, 1998, outstanding letters of credit aggregated $66.9 million. In addition, the Company has a $100 million revolving credit and security agreement from a financial institution with $98.1 million outstanding at January 30, 1998. Further, the Company has available for issuance under its "unallocated" shelf registration statement filed with the Securities and Exchange Commission $300 million of common stock, preferred stock and senior and subordinated unsecured debt securities. The Company has had only limited involvement with derivative financial instruments, and does not use them for trading purposes. The Company has entered into derivatives, exclusively interest rate swaps and caps, to lower funding costs or alter interest rate exposures for long-term liabilities. At January 30, 1998, the Company had no derivative financial instruments. At January 31, 1997, the Company had five interest rate swap agreements outstanding with financial institutions, having notional amounts of $10 million each and a total notional amount of $50 million and was a party to five interest rate cap agreements, each with terms tied to the terms of the interest rate swap agreements. These interest rate swap and cap agreements expired in 1997. The Company's major market risk exposure is the potential loss arising from changing interest rates and its impact on long-term investments and long- term debt. The Company's policy is to manage interest rate risks by maintaining a combination of fixed and variable rate financial instruments. At January 30, 1998, long-term investments consisted of $35.2 million in municipal obligations, classified as available-for-sale securities. Although the fair value of these securities, like all fixed income securities, would fall if interest rates increase, the Company has the ability to hold its fixed income investments until maturity and not experience an adverse impact on earnings or cash flows. The following table summarizes the Company's market risks associated with long-term debt. The table presents principal cash out flows and related interest rates by fiscal year of maturity. Fair values included below were determined using quoted market rates or interest rates that are currently available to the Company on debt with similar terms and remaining maturities.
Long-Term Debt Maturities by Fiscal Year (Dollars in Millions) There- Fair 1998 1999 2000 2001 2002 after Total Value Fixed Rate $11.3 $96.4 $47.4 $29.5 $59.1 $810.7 $1,054.4 $1,139.7 Average interest rate 8.67% 7.32% 7.27% 8.23% 8.05% 7.94% Variable Rate $ 1.1 $ 1.5 $ 0.4 $ 0.4 $ 0.4 $ 2.9 $ 6.7 $ 6.7 Average interest rate 4.26% 3.99% 4.25% 4.25% 4.25% 3.76%
The Company's 1998 capital budget is targeted at $1.4 billion, inclusive of approximately $400 million of operating or capital leases. More than 80% of this planned commitment is for store expansion. Expansion plans for 1998 consist of approximately 75 to 80 new stores with about 60% in new markets and the balance being relocations of existing stores the combination of which will increase sales floor square footage by approximately 20%. Approximately 30% of the 1998 projects will be leased and 70% will be owned. Additionally, the Company has entered into an agreement with a lessor to build a 1.17 million square foot distribution center in Pennsylvania which is expected to be operational in Spring 1999. This new distribution center includes a 195 thousand square foot specialty distribution center at the same site. At January 30, 1998, the Company operated four regional distribution centers and ten smaller support facilities. The Company believes that funds from operations, funds from debt issuances, leases and existing short-term credit agreements will be adequate to finance the 1998 expansion plan and other operating needs. General inflation has not had a material impact on the Company during the past three years. As noted above, the LIFO credit was $7.0 million in 1997 compared to charges of $1.4 million in 1996, and $8.3 million in 1995. Overall inventory deflation was .99% for 1997. There was overall inflation of .15% and .79% for 1996 and 1995, respectively. In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) was issued. SFAS 130 will require disclosure of comprehensive income (which is defined as "the change in equity during a period excluding changes resulting from investments by shareholders and distributions to shareholders") and its components. SFAS 130 is effective for fiscal years beginning after December 15, 1997, with reclassification of comparative years. The Company will adopt SFAS 130 in the year ending January 29, 1999. Had the new standard been applied in 1997, there would have been no material difference between comprehensive and reported income. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) was also issued in June 1997. SFAS 131 is effective for the Company in the fiscal year ending January 29, 1999. SFAS 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. Management does not believe that the adoption of SFAS 131 will have a material impact on the Company's current disclosures of its one operating segment, home improvement retailing. Pages 22 - 32: Lowe's Companies, Inc. Consolidated Statements of Earnings In Thousands, Except Per Share Data Fiscal Years Ended on
January 30, % January 31, % January 31, % 1998 Sales 1997 Sales 1996 Sales Net Sales $10,136,890 100.0% $8,600,241 100.0% $7,075,442 100.0% Cost of Sales 7,447,117 73.5 6,376,482 74.1 5,312,195 75.1 Gross Margin 2,689,773 26.5 2,223,759 25.9 1,763,247 24.9 Expenses: Selling, General and administrative 1,683,000 16.6 1,395,523 16.2 1,127,333 15.9 Store Opening Costs 69,999 0.7 59,159 0.7 49,626 0.7 Depreciation 240,880 2.4 198,115 2.3 150,011 2.1 Employee Retirement Plans (Note 10) 71,780 0.7 68,289 0.8 46,130 0.7 Interest (Notes 6 and 13) 65,567 0.6 49,067 0.6 38,040 0.5 Total Expenses 2,131,226 21.0 1,770,153 20.6 1,411,140 19.9 Pre-Tax Earnings 558,547 5.5 453,606 5.3 352,107 5.0 Income Tax Provision (Note 11) 201,063 2.0 161,456 1.9 126,080 1.8 Net Earnings $357,484 3.5 $292,150 3.4% $226,027 3.2% Shares Outstanding-Weighted Average (Note 7) 174,277 167,599 160,377 Basic Earnings Per Share $2.05 $1.74 $1.41 Diluted Earnings Per Share $2.05 $1.71 $1.36 Cash Dividends Per Share $ .22 $ .21 $ .19 See accompanying notes to consolidated financial statements.
Lowe's Companies, Inc. Consolidated Balance Sheets In thousands
January 30, % January 31, % 1998 Total 1997 Total Assets Current Assets: Cash and Cash Equivalents $195,146 3.7% $40,387 0.9% Short-Term Investments (Note 2) 16,155 0.3 30,103 0.7 Accounts Receivable - Net 118,408 2.3 117,562 2.7 Merchandise Inventory 1,714,592 32.8 1,605,880 36.2 Deferred Income Taxes (Note 11) 34,116 0.7 19,852 0.4 Other Current Assets 31,185 0.6 37,682 0.8 Total Current Assets 2,109,602 40.4 1,851,466 41.7 Property, Less Accumulated Depreciation (Notes 3 and 5) 3,005,199 57.6 2,494,396 56.3 Long-Term Investments (Note 2) 35,161 0.7 35,615 0.8 Other Assets 69,315 1.3 53,477 1.2 Total Assets $5,219,277 100.0% $4,434,954 100.0% Liabilities and Shareholders' Equity Current Liabilities: Short-Term Notes Payable (Note 4) $98,104 1.9% $80,905 1.8% Current Maturities of Long-Term Debt (Note 5) 12,478 0.2 22,566 0.5 Accounts Payable 969,777 18.7 914,167 20.6 Employee Retirement Plans (Note 10) 64,669 1.2 60,770 1.4 Accrued Salaries and Wages 83,377 1.6 71,662 1.6 Other Current Liabilities 220,915 4.2 198,461 4.5 Total Current Liabilities 1,449,320 27.8 1,348,531 30.4 Long-Term Debt, Excluding Current Maturities (Note 5) 1,045,570 20.0 767,338 17.3 Deferred Income Taxes (Note 11) 123,778 2.4 101,609 2.3 Total Liabilities 2,618,668 50.2 2,217,478 50.0 Shareholders' Equity (Notes 5 and 8): Preferred Stock - $5 Par Value, none issued - - Common Stock - $.50 Par Value; Issued and Outstanding January 30, 1998 175,316 January 31, 1997 173,404 87,658 1.6 86,702 2.0 Capital in Excess of Par 980,324 18.8 903,661 20.3 Retained Earnings 1,565,133 30.0 1,245,888 28.1 Unearned Compensation-Restricted Stock Awards (32,694) -0.6 (18,434) (0.4) Unrealized Gain (Loss) on Available- For-Sale Securities 188 - (341) - Total Shareholders' Equity 2,600,609 49.8 2,217,476 50.0 Total Liabilities and Shareholders' Equity $5,219,277 100.0 $4,434,954 100.0% See accompanying notes to consolidated financial statements.
Lowe's Companies, Inc. Consolidated Statement of Shareholders' Equity In Thousands
Unrealized Unearned Gain/(Loss) on Total Capital in Compensation Available Share- Common Stock Excess of Retained Restricted For Sale Holders' Shares Amount Par Value Earnings Stock Awards Securities Equity Balance January 31,1995 159,527 $79,764 $554,838 $792,891 $ (5,949) $(1,654) $1,419,890 Net Earnings 226,027 226,027 Tax Effect of Non-qualified Stock Options Exercised 25 25 Cash Dividends (30,471) (30,471) Stock Options Exercised (Note 8) 4 2 42 44 Stock Issued to ESOP (Note 10) 1,182 591 36,631 37,222 Conversion of 3% Notes 97 49 2,183 2,232 Shares issued to Directors 4 2 93 95 Unearned Compensation- Restricted Stock Awards (Note 8) 104 51 3,016 (2,127) 940 Unrealized Gain on Available-for-Sale Securities, Net of Income Taxes of $378 711 711 Balance January 31, 1996 160,918 80,459 596,828 988,447 (8,076) (943) 1,656,715 Net Earnings 292,150 292,150 Cash Dividends (34,709) (34,709) Stock Issued to ESOP 1,215 607 43,283 43,890 Conversion of 3% Notes 10,897 5,448 251,350 256,798 Shares issued to Directors 4 2 135 137 Unearned Compensation- Restricted Stock Awards (Note 8) 370 186 12,065 (10,358) 1,893 Unrealized Gain on Available-for-Sale Securities, Net of Income Taxes of $325 602 602 Balance January 31, 1997 173,404 86,702 903,661 1,245,888 (18,434) (341) 2,217,476 Net Earnings 357,484 357,484 Tax Effect of Non-qualified Stock Options Exercised 87 87 Cash Dividends (38,239) (38,239) Stock Options Exercised (Note 8) 14 7 228 235 Stock Issued to ESOP (Note 10) 1,492 746 55,884 56,630 Shares issued to Directors 4 2 155 157 Unearned Compensation- Restricted Stock Awards (Note 8) 402 201 20,309 (14,260) 6,250 Unrealized Gain on Available-for-Sale Securities, Net of Income Taxes of $268 529 529 Balance January 30, 1998 175,316 $87,658 $980,324 $1,565,133 $(32,694) $ 188 $2,600,609 See accompanying notes to consolidated financial statements.
Lowe's Companies, Inc. Consolidated Statements of Cash Flows In Thousands Fiscal Years Ended on
January 30, January 31, January 31, 1998 1997 1996 Cash Flows From Operating Activities: Net Earnings $357,484 $292,150 $226,027 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Depreciation 240,880 198,115 150,011 Amortization of Original Issue Discount 192 1,671 3,601 Increase in Deferred Income Taxes 7,637 17,043 32,924 (Gain) Loss on Disposition/Writedown of Fixed and Other Assets 14,263 9,892 (1,171) Changes in Operating Assets and Liabilities: Accounts Receivable - Net (846) (4,079) (4,269) Merchandise Inventory (108,712) (338,803) (134,795) Other Operating Assets 6,732 (4,788) (3,298) Accounts Payable 55,610 258,768 (20,037) Employee Retirement Plans 60,527 59,736 38,196 Other Operating Liabilities 31,103 53,288 16,120 Net Cash Provided by Operating Activities 664,870 542,993 303,309 Cash Flows from Investing Activities: (Increase) Decrease in Investment Assets: Short-Term Investments 25,773 98,754 18,538 Purchases of Long-Term Investments (15,384) (27,259) (30,906) Proceeds from Sale/Maturity of Long-Term Investments 4,811 12,203 66,588 (Increase) Decrease in Other Long-Term Assets (5,472) 3,456 (2,656) Fixed Assets Acquired (772,792) (677,160) (520,362) Proceeds from the Sale of Fixed and Other Long-Term Assets 31,183 11,615 20,856 Net Cash Used in Investing Activities (731,881) (578,391) (447,942) Cash Flows from Financing Activities: Long-Term Debt Borrowings 265,795 - 98,959 Net Increase in Short-Term Borrowings 17,199 64,288 14,714 Proceeds from Stock Options Exercised 210 - 44 Repayment of Long-Term Debt (32,781) (17,662) (25,064) Cash Dividend Payments (28,653) (34,709) (30,471) Net Cash Provided by Financing Activities 221,770 11,917 58,182 Net Increase (Decrease) in Cash and Cash Equivalents 154,759 (23,481) (86,451) Cash and Cash Equivalents, Beginning of Year 40,387 63,868 150,319 Cash and Cash Equivalents, End of Year $195,146 $40,387 $63,868 See accompanying notes to consolidated financial statements.
LOWE'S COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED JANUARY 30, 1998, JANUARY 31, 1997 AND 1996 NOTE 1 - Summary of Significant Accounting Policies: The Company is one of the largest retailers serving the do-it-yourself home improvement, home decor, and home construction markets in the United States. The Company serves customers in 446 stores in 25 states predominantly located in the eastern half of the United States. Below are those accounting policies considered to be significant. Fiscal Year - Effective February 1, 1997, the Company adopted a 52 or 53 week fiscal year, changing the year end date from January 31 to the Friday nearest January 31. The fiscal year ended January 30, 1998 had 52 weeks. All references herein for the years 1997, 1996 and 1995 represent the fiscal years ended January 30, 1998 and January 31, 1997 and 1996, respectively. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All material intercompany accounts and transactions have been eliminated. Use of Estimates - The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of three months or less when purchased. Investments - The Company has a cash management program which provides for the investment of excess cash balances in financial instruments which have maturities of up to five years. Investments, exclusive of cash equivalents, with a maturity of one year or less from the balance sheet date are classified as short-term investments. Investments with maturities greater than one year are classified as long-term. Investments consist primarily of tax-exempt notes and bonds, municipal preferred tax-exempt stock and repurchase agreements. The Company has classified all investment securities as available-for-sale and they are carried at fair value. Unrealized gains and losses on such securities are excluded from earnings and reported as a separate component of shareholders' equity, net of the related income taxes, until realized. Derivatives - The Company does not use derivative financial instruments for trading purposes. Interest rate swap agreements, which are principally used by the Company in the management of interest rate exposure, are accounted for on an accrual basis. Income and expense are recorded in the same category as that arising from the related liability. Amounts to be paid or received under interest rate swap agreements are recognized as interest income or expense in the periods in which they accrue. Premiums paid for purchased interest rate cap agreements are amortized to interest expense over the terms of the caps. Unamortized premiums are included in other assets in the consolidated balance sheet. Amounts to be received under the cap agreements are accounted for on an accrual basis, and are recognized as a reduction of interest expense. The Company had no derivative financial instruments at January 30, 1998. Accounts Receivable - The majority of the accounts receivable arise from sales to professional building contractors. The allowance for doubtful accounts is based on historical experience and a review of existing receivables. The allowance for doubtful accounts was $1.6 and $2.3 million at January 30, 1998 and January 31, 1997, respectively. Sales generated through the Company's private label credit card are not reflected in receivables. Under an agreement with Monogram Credit Card Bank of Georgia (the Bank), a wholly owned subsidiary of General Electric Capital Corporation, consumer credit is extended directly to customers by the Bank and all credit program related services are performed directly by the Bank. Merchandise Inventory - Inventory is stated at the lower of cost or market. In an effort to more closely match cost of sales and related sales, cost is determined using the last-in, first-out (LIFO) method. Included in inventory cost are administrative, warehousing and other costs directly associated with buying, distributing and maintaining inventory in a condition for resale. If the FIFO method had been used, inventories would have been $67.6 and $74.6 million higher at January 30, 1998 and January 31, 1997, respectively. Property and Depreciation - Property is recorded at cost. Costs associated with major additions are capitalized and depreciated. Upon disposal, the cost of properties and related accumulated depreciation is removed from the accounts with gains and losses reflected in earnings. Depreciation is provided over the estimated useful lives of the depreciable assets. Assets are generally depreciated on the straight-line method. Leasehold improvements are depreciated over the shorter of their estimated useful lives or term of the related lease. Leases - Assets under capital leases are amortized in accordance with the Company's normal depreciation policy for owned assets or over the lease term if shorter and the charge to earnings is included in depreciation expense in the consolidated financial statements. Income Taxes - Income taxes are provided for temporary differences between the tax and financial accounting bases of assets and liabilities using the liability method. The tax effects of such differences are reflected in the balance sheet at the enacted tax rates expected to be in effect when the differences reverse. Store Pre-opening Costs - Costs of opening new retail stores are charged to operations as incurred. Store Closing Costs - Losses related to impairment of long-lived assets and for long-lived assets to be disposed of are recognized when expected future cash flows are less than the assets' carrying value. At the time management commits to close or relocate a store location, the Company evaluates the carrying value of the assets in relation to its expected future cash flows. If the carrying value of the assets is greater than the expected future cash flows, a provision is provided for the impairment of the assets. When a leased location closes, a provision is provided for the present value of future lease obligations, net of anticipated sublease income. The estimated realizable value of closed store real estate is included in other assets. Advertising - Costs associated with advertising are charged to operations as incurred. Advertising expenses were $125.6, $99.8 and $87.8 million for 1997, 1996 and 1995, respectively. Recent Accounting Pronouncements - In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) was issued. SFAS 130 will require disclosure of comprehensive income (which is defined as "the change in equity during a period excluding changes resulting from investments by shareholders and distributions to shareholders") and its components. SFAS 130 is effective for fiscal years beginning after December 15, 1997, with reclassification of comparative years. The Company will adopt SFAS 130 in the year ending January 29, 1999. Had the new standard been applied in 1997, there would have been no material difference between comprehensive and reported income. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131) was also issued in June 1997. SFAS 131 is effective for the Company in the fiscal year ending January 29, 1999. SFAS 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. Management does not believe that the adoption of SFAS 131 will have a material impact on the Company's current disclosures of its one operating segment, home improvement retailing. NOTE 2 - Investments: The amortized cost, gross unrealized holding gains and losses and fair values of investment securities, all of which are classified as available-for-sale securities, at January 30, 1998 and January 31, 1997 are as follows: Amortized Gross Unrealized Fair Type Cost Gains Losses Value (In Thousands) Municipal Obligations $14,557 - - $14,557 Adjustable Rate Preferred Stock 1,614 - $(16) 1,598 Classified as Short-Term 16,171 - (16) 16,155 Municipal Obligations - Classified as Long-Term 34,904 $291 (34) 35,161 Total at January 30, 1998 $51,075 $291 $(50) $51,316 Municipal Obligations $19,514 $ 1 - $19,515 Adjustable Rate Preferred Stock 11,010 - $(422) 10,588 Classified as Short-Term 30,524 1 (422) 30,103 Municipal Obligations - Classified as Long-Term 35,718 139 (242) $35,615 Total at January 31, 1997 $66,242 $140 $(664) $65,718 The proceeds from sales of available-for-sale securities were $14.3, $15.1 and $60.4 million for 1997, 1996 and 1995, respectively. Gross realized gains and (losses) on the sale of available-for-sale securities were $89 thousand and $(26) thousand for 1997, $80 thousand and $(535) thousand for 1996 and $326 thousand and $(426) thousand for 1995. Municipal obligations classified as long-term at January 30, 1998 will mature in 1 to 5 years. NOTE 3 - Property and Accumulated Depreciation: Property is summarized below by major class: January 30, January 31, 1998 1997 (In Thousands) Cost: Land $ 711,930 $ 484,100 Buildings 1,533,954 1,324,323 Store, Distribution and Office Equipment 1,393,718 1,175,411 Leasehold Improvements 155,392 120,269 Total Cost 3,794,994 3,104,103 Accumulated Depreciation and Amortization (789,795) (609,707) Net Property $3,005,199 $2,494,396 The estimated depreciable lives, in years, of the Company's property are: buildings, 20 to 40; store, distribution and office equipment, 3 to 10; leasehold improvements, generally the life of the related lease. Net property includes $438.4 and $421.9 million in assets under capital leases at January 30, 1998 and January 31, 1997, respectively. NOTE 4 - Short-Term Borrowings and Lines of Credit: The Company has a $300 million revolving credit facility with a syndicate of 10 banks. The facility has $100 million expiring November 1998, with the remaining $200 million expiring November 2001. The facility is used to support the Company's commercial paper program and for short-term borrowings. Facility fees ranging from .06% to .075% are paid on the unused amount of these facilities. At January 30, 1998, there were no borrowings outstanding under this revolving credit facility. Several banks have extended lines of credit aggregating $206 million for the purpose of issuing documentary letters of credit and standby letters of credit. These lines do not have termination dates but are reviewed periodically. Commitment fees ranging from .085% to .50% per annum are paid on the amounts of standby letters of credit used. At January 30, 1998, outstanding letters of credit aggregated $66.9 million. A $100 million revolving credit and security agreement, expiring in September 1998 and renewable annually, is available from a financial institution. At January 30, 1998, there was $98.1 million outstanding under this credit and security agreement and $105.3 million of the Company's accounts receivable were pledged as collateral. In addition, $80 million is available, on an unsecured basis, for the purpose of short-term borrowings on a bid basis from various banks. These lines are uncommitted and are reviewed periodically by both the banks and the Company. At January 30, 1998, there were no borrowings outstanding under these lines of credit. NOTE 5 - Long-Term Debt: Fiscal Year of Final January 30, January 31, Debt Category Interest Rates Maturity 1998 1997 (In Thousands) Secured Debt:1 Industrial Revenue Bonds 3.55% to 6.46% * 2020 $ 4,314 $ 5,497 Industrial Revenue Bonds 2 4.25% * 2005 2,700 5,400 Insurance Company Notes 6.75% 1998 4 161 Other Notes 8.00% to 9.50% 2005 2,497 388 Unsecured Debt:3 Medium Term Notes 4 6.50% to 8.20% 2037 504,787 249,985 Senior Notes 6.38% 2005 99,177 99,072 Capital Leases 6.58% to 13.31% 2033 444,569 429,401 Total Long-Term Debt 1,058,048 789,904 Less Current Maturities 12,478 22,566 Long-Term Debt, Excluding Current Maturities $1,045,570 $767,338 Interest rate varies as a percentage of prime rate or other interest index. Interest rates shown are as of January 30, 1998. Prime rate was 8.5% at January 30, 1998. Debt maturities, exclusive of capital leases, for the next five fiscal years are as follows (in millions): 1998, $1.6; 1999, $86.0; 2000, $34.9; 2001, $15.8; 2002, $43.9. The Company is party to certain capital lease agreements which may limit its ability to declare dividends under certain circumstances. Notes: 1 Real properties pledged as collateral for secured debt had net book values (in millions) at January 30, 1998, as follows: industrial revenue bonds - $13.9; insurance company notes - $3.3; other notes - $6.0. 2 With certain restrictions, the floating rate demand industrial revenue bonds can be converted to a fixed interest rate based on a fixed interest index at the Company's option. 3 On February 9, 1998, the Company issued $300 million of 6.875% Debentures due February 15, 2028. The debentures were issued at an original price of $987.20 per $1,000 principal amount, which represented an original issue discount of .405% payable at maturity and an underwriters' discount of .875%. The debentures may not be redeemed prior to maturity. 4 During 1997, the Company sold $268 million aggregate principal of Medium- Term Notes (MTN's) to investors with final maturities ranging from September 1, 2007 to May 15, 2037, at interest rates ranging from 6.70% to 7.61%. Approximately 37% of these MTN's may be put at the option of the holder on either the tenth or twentieth anniversary date of the issue. NOTE 6 - Financial Instruments: At January 30, 1998, the Company had no derivative financial instruments. In prior years, interest rate swaps allowed the Company to raise long-term borrowings at fixed rates and swap them into variable rates for shorter durations. At January 31, 1997, the Company had 5 interest rate swap agreements outstanding with financial institutions, having notional amounts of $10 million each and a total notional amount of $50 million. Under the agreements, the Company received interest payments at an average fixed rate of 6.20% and paid interest on the same notional amounts at a floating rate based on an interest rate index, which was 5.69% as of January 31, 1997. These interest rate swap agreements expired in 1997. Interest rate cap agreements were used to reduce the potential impact of increases in interest rates on the interest rate swap agreements discussed above. At January 31, 1997, the Company was a party to 5 interest rate cap agreements, each with terms tied to the terms of the interest rate swap agreements. The agreements entitled the Company to receive from counterparties on a semi-annual basis the amounts, if any, by which the Company's interest payments on its $50 million notional amount of interest rate swap agreements exceed approximately 75 basis points over the fixed rate on each swap. The Company was exposed to credit loss in the event of nonperformance by the counterparties to its interest rate swap and cap agreements. The counterparties were able to fully satisfy their obligations under the agreements. The counterparties consisted of a number of financial institutions whose credit ratings were AA or better at the time the agreements were instituted. No collateral was held in relation to the agreements. The following are financial instruments whose estimated fair value amounts are different from their carrying amounts. Estimated fair values have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. January 30, 1998 January 31, 1 997 Carrying Fair Carrying Fair (In Thousands) Amount Value Amount Value Liabilities: Long-Term Debt $1,058,048 $1,146,434 $789,904 $818,508 Long-term debt - Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. Interest rate swap agreements - The fair value of interest rate swaps are the amounts at which they could be settled, based on estimates obtained from dealers. There were no off-balance sheet financial instruments at January 30, At January 31, 1997, the fair value of interest rate swap agreements $84 thousand. NOTE 7 - Earnings Per Share: In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128) was issued. In accordance with SFAS 128, the Company has retroactively adopted the new standard in the quarter and year ended January 30, 1998. SFAS 128 requires dual presentation of basic and diluted earnings per share (EPS) on the face of the consolidated statement of earnings and a reconciliation of the components of the basic and diluted EPS calculations in the notes to the financial statements. Basic EPS excludes dilution and is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted EPS is similar to fully diluted EPS pursuant to Accounting Principles Board (APB) Opinion No. 15. Following is the reconciliation of EPS for fiscal years 1997, 1996 and 16. 1995. (In Thousands, Except Per Share Data) 1997 1996 1995 Basic Earnings per Share: Net Earnings $357,484 $292,150 $226,027 Weighted Average Shares Outstanding 174,277 167,599 160,377 Basic Earnings per Share $2.05 $1.74 $1.41 Diluted Earnings per Share: Net Earnings $357,484 $292,150 $226,027 Interest (After Taxes) on Convertible Debt - 3,620 7,589 Net Earnings, as Adjusted $357,484 $295,770 $233,616 Weighted Average Shares Outstanding 174,277 167,599 160,377 Dilutive Effect of Stock Options 103 79 76 Dilutive Effect of Convertible Debt - 5,006 10,898 Weighted Average Shares, as Adjusted 174,380 172,684 171,351 Diluted Earnings per Share $2.05 $1.71 $1.36 NOTE 8 - Shareholders' Equity: Authorized shares of common stock were 700 million at January 30, 1998 and January 31, 1997 and 1996. The Company has 5 million authorized shares of preferred stock ($5 par), none of which have been issued. The preferred stock may be issued by the Board of Directors (without action by shareholders) in one or more series, having such voting rights, dividend and liquidation preferences and such conversion and other rights as may be designated by the Board of Directors at the time of issuance of the preferred shares. The Company has a shareholder rights plan which provides for a dividend distribution of one preferred share purchase right on each outstanding share of common stock. Each purchase right will entitle shareholders to buy one unit of a newly authorized series of preferred stock. A shareholder's interest is not diluted by the effects of a stock dividend or stock split. At the time of adopting the rights plan, each unit was intended to be the equivalent of one share of common stock. The purchase rights will be exercisable only if a person or group acquires or announces a tender offer for 20% or more of Lowe's common stock. The purchase rights do not apply to the person or group acquiring the stock. The Company has two stock incentive plans, referred to as the "1994" and "1997" Incentive Plans, under which incentive and non-qualified stock options, stock appreciation rights, restricted stock awards and incentive awards may be granted to key employees. No awards may be granted after January 31, 2004 under the 1994 plan and 2007 under the 1997 plan. Stock options generally have terms ranging from 5 to 10 years, vest evenly over 3 years and are assigned an exercise price of not less than the fair market value on the date of grant. At January 30, 1998, there were 23,790 and 4,303,750 shares available for grants under the 1994 and 1997 plans, respectively. Option information is summarized as follows: Key Employee Stock Option Plans Weighted-average Shares Exercise Price Per Share (In Thousands) Outstanding January 31, 1995 and 1996 20 $38.75 Canceled or Expired (10) $38.75 Granted 1,215 $39.13 Outstanding January 31, 1997 1,225 $39.12 Granted 747 $45.09 Canceled or Expired (10) $39.13 Exercised (2) $39.13 Outstanding January 30, 1998 1,960 $41.40 Exercisable January 30, 1998 417 $39.12 Of the 1,960,000 options outstanding at January 30, 1998, the exercise prices per share range from $38.75 to $47.31 and their weighted-average remaining term is 4.2 years. Stock appreciation rights are denominated in units, which are comparable to a share of common stock for purposes of determining the amount payable under an award. An award entitles the participant to receive the excess of the final value of the unit over the fair market value of a share of common stock on the first day of the performance period. The final value is the average closing price of a share of common stock during the last month of the performance period. Limits are established with respect to the amount payable on each unit. A total of 496,050 stock appreciation rights, with performance periods of three years and a maximum payout of $3,720,375, were outstanding at January 30, 1998. The costs of these rights are being expensed over the performance periods and have reduced pre-tax earnings by $0.9, $1.0 and $1.0 million in 1997, 1996 and 1995, respectively. Restricted stock awards of 435,350, 388,550 and 133,500 shares, with per share weighted-average fair values of $49.61, $33.14 and $31.25, were granted to certain executives in 1997, 1996 and 1995, respectively. These shares are nontransferable and subject to forfeiture for periods prescribed by the Company. These shares may become transferable and vested earlier based on achievement of certain performance measures. During 1997, a total of 20,200 shares were forfeited and 39,750 shares became vested. At January 30, 1998, grants totaling 991,900 shares are included in Shareholder's Equity and are being amortized as earned over periods not exceeding seven years. Related amortization expense for 1997, 1996 and 1995 was $6.2, $1.9 and $0.6 million, respectively. The Company has a Directors' Stock Incentive Plan. This Plan provides that at the first Board meeting following each annual meeting of shareholders, the Company shall issue each non-employee Director 500 shares of common stock. Up to 25,000 shares may be issued under this Plan. In 1997, 1996 and 1995, 4,000, 4,000 and 3,500 shares, respectively, were issued under this Plan. Prior to its expiration in 1994, 140,000 stock options were issued under a Non-Employee Directors' Stock Option Plan. At January 30, 1998, 68,000 shares have been exercised and 72,000 shares were exercisable. Of the remaining outstanding options at January 30, 1998, the exercise price per share ranges from $6.375 to $18.875 and their weighted-average remaining term is 3.5 years. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for stock- based compensation where the option price of the stock approximated the fair market value of the stock on the date of grant, other than for restricted stock grants and stock appreciation rights. No stock options were granted in 1995. Had compensation for 1997 and 1996 stock options granted been determined consistent with Statement of Financial Accounting Standards No. 123 SFAS 123), "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share (EPS) amounts for 1997 and 1996 would approximate the following proforma amounts (in thousands, except per share data): 1997 1996 As Reported Proforma As Reported Proforma Net Earnings $357,484 $352,217 $292,150 $291,411 Basic EPS $ 2.05 $ 2.02 $ 1.74 $ 1.74 Diluted EPS $ 2.05 $ 2.02 $ 1.71 $ 1.71 The fair values of each option granted on the date of grant were estimated as $19.12 for options granted on December 5, 1997, $17.09 for options granted on May 30, 1997 and $16.99 for options granted on December 6, 1996, using the Black-Scholes option-pricing model with the following assumptions, respectively: expected volatility of 34%, 37% and 38%, expected dividend yield of 0.6% for each grant; risk-free interest rate of 5.9%, 6.5% and 6.0%; and an expected life of 5 years for each grant. The effects of applying SFAS 123 in this proforma disclosure are not indicative of future amounts. NOTE 9 - Leases: The Company leases certain store facilities under agreements with original terms generally of twenty years. Agreements generally provide for contingent rental based on sales performance in excess of specified minimums. To date, contingent rentals have been nominal. The leases typically contain provisions for four renewal options of five years each. Certain equipment is also leased by the Company under agreements ranging from two to five years. These agreements typically contain renewal options providing for a renegotiation of the lease, at the Company's option, based on the fair market value at that time. The future minimum rental payments required under capital and operating leases having initial or remaining noncancelable lease terms in excess of one year are summarized as follows: Operating Leases Capital Leases Fiscal Year Real Estate Equipment Real Estate Equipment Total (In Thousands) 1998 $ 85,053 $ 755 $ 49,093 $ 291 $ 135,192 1999 97,154 708 49,094 291 147,247 2000 96,101 271 49,112 218 145,702 2001 95,841 - 49,132 98 145,071 2002 95,627 - 49,133 98 144,858 Later Years 1,300,892 - 637,798 49 1,938,739 Total Minimum Lease Payments $1,770,668 $1,734 $883,362 $1,045 $2,656,809 Total Minimum Capital Lease Payments $884,407 Less Amount Representing Interest 439,838 Present Value of Minimum Lease Payments 444,569 Less Current Maturities 10,896 Present Value of Minimum Lease Payments, Less Current Maturities $433,673 Rental expenses under operating leases for real estate and equipment were $65.4, $59.2 and $54.1 million in 1997, 1996 and 1995, respectively. NOTE 10 - Employee Retirement Plans: The Company's contribution to its Employee Stock Ownership Plan (ESOP) is determined annually by the Board of Directors. The ESOP covers all employees after completion of one year of employment and 1,000 hours of service during that year. Contributions are allocated to participants based on their eligible compensation relative to total eligible compensation. The Board authorized contributions totaling 13% of eligible compensation for 1997 and 14% of eligible compensation for 1996 and 1995. Contributions may be made in cash or shares of the Company's common stock and are generally made in the following year. ESOP expense for 1997, 1996 and 1995 was $63.1, $61.1 and $40.1 million, respectively. At January 30, 1998, the Employee Stock Ownership Trust held approximately 10.2% of the outstanding common stock of the Company. Shares allocated to ESOP participants' accounts are voted by the trustee according to participants' voting instructions. The Board of Directors determines contributions to the Company's Employee Savings and Investment Plan (ESIP) each year based upon a matching formula applied to employee contributions. All employees are eligible to participate in the ESIP on the first day of the month following completion of one year of employment. Company contributions to the ESIP for 1997, 1996 and 1995 were $8.7, $7.2 and $6.0 million, respectively. The Company's common stock is an investment option for participants in the ESIP. At January 30, 1998, the ESIP held approximately 0.7% of the outstanding common stock of the Company. Shares held in the ESIP are voted by the trustee as directed by an administrative committee of the ESIP. NOTE 11 - Income Taxes:
1997 1996 1995 Amount % Amount % Amount % (In Thousands) ___________________Statutory Rate Reconciliation___________________ Pre-Tax Earnings $558,547 100.0% $453,606 100.0% $352,107 100.0% Federal Income Tax at Statutory Rate 195,491 35.0 158,762 35.0 123,237 35.0 State Income Taxes-Net of Federal Tax Benefit 12,406 2.2 7,968 1.8 8,093 2.3 Other, Net (6,834) (1.2) (5,274) (1.2) (5,250) (1.5) Total Income Tax Provision $201,063 36.0% $161,456 35.6% $126,080 35.8% _________________Components of Income Tax Provision________________ Current Federal $175,649 87.4% $135,075 83.7% $86,347 68.5% State 17,777 8.8 9,338 5.8 6,809 5.4 Total Current 193,426 96.2 144,413 89.5 93,156 73.9 Deferred Federal 6,328 3.1 14,122 8.7 27,282 21.6 State 1,309 0.7 2,921 1.8 5,642 4.5 Total Deferred 7,637 3.8 17,043 10.5 32,924 26.1 Total Income Tax Provision $201,063 100.0% $161,456 100.0% $126,080 100.0% The tax effect of cumulative temporary differences and carryforwards that gave rise to the deferred tax assets and liabilities and the related valuation allowance at January 30, 1998 and January 31, 1997 is as follows (in thousands): January 30, 1998 January 31, 1997 (In Thousands) Assets Liabilities Total Assets Liabilities Total Accrued Excess Property and Store Closing Costs $16,208 - $16,208 $13,966 - $13,966 Insurance 11,338 - 11,338 9,470 - 9.470 Depreciation - $(144,601) (144,601) - $(117,779) (117,779) Property Taxes 3,140 - 3,140 5,371 - 5,371 Other, Net 36,001 (11,748) 24,253 17,081 (9,555) 7,526 Less Valuation Allowance - - - (311) - (311) Total $66,687 $(156,349) $(89,662) $45,577 $(127,334) $(81,757) The valuation allowance decreased $311,000 in 1997 and $1,254,000 in 1996, and increased $1,416,000 in 1995.
NOTE 12 - Commitments, Contingencies and Litigation: The Company is a defendant in legal proceedings considered to be in the normal course of business, none of which, singularly or collectively, are considered material to the Company. NOTE 13 - Other Information: Net interest expense is composed of the following: 1997 1996 1995 (In Thousands) Long-Term Debt $34,936 $31,300 $34,536 Capitalized Leases 38,255 29,076 16,872 Short-Term Debt 7,913 4,368 3,001 Amortization of Loan Costs 527 403 296 Short-Term Interest Income (7,741) (8,765) (10,897) Interest Capitalized (8,323) (7,315) (5,768) Net Interest Expense $65,567 $49,067 $38,040 _____________________________________________________________________________ Supplemental Disclosures of Cash Flow Information: 1997 1996 1995 (In Thousands) Cash Paid for Interest (Net of Amount Capitalized) $ 74,005 $ 66,350 $55,231 Cash Paid for Income Taxes $ 196,144 $125,266 $77,858 _____________________________________________________________________________ Noncash Investing and Financing Activities: Fixed Assets Acquired under Capital Leases $32,738 $182,676 $96,948 Common Stock Issued to ESOP (Note 10) 56,628 43,890 37,222 Common Stock Issued to Executives and Directors, net of Unearned Compensation 6,407 2,030 1,035 Conversion of Debt to Common Stock 256,798 2,232 Notes Received in Exchange for Property 600 - 1,450 Notes Issued in Exchange for Property $ 2,200 $ - $ - _____________________________________________________________________________ Page 33 LOWE'S COMPANIES, INC. SELECTED FINANCIAL DATA (In Thousands, Except Per Share Data)
(Unaudited) 1997 1996 1995 1994 1993 Selected Income Statement Data: Net Sales $10,136,890 $8,600,241 $7,075,442 $6,110,521 $4,538,001 Net Earnings 357,484 292,150 226,027 223,560 131,786 Basic Earnings Per Share 2.05 1.74 1.41 1.44 .89 Diluted Earnings Per Share 2.05 1.71 1.36 1.39 .89 Dividends Per Share $ .22 $ .21 $ .19 $ .18 $ .16 Selected Balance Sheet Data: Total Assets $5,219,277 $4,434,954 $3,556,386 $3,105,992 $2,201,648 Long-Term Debt, Including Current Maturities $1,058,048 $ 789,904 $ 880,310 $ 708,097 $ 641,880 Selected Quarterly Data (Unaudited) * Fourth Third Second First 1997 Net Sales $2,397,568 $2,530,481 $2,808,086 $2,400,754 Gross Margin 664,090 670,886 731,093 623,703 Net Earnings 72,507 88,099 126,496 70,383 Basic Earnings Per Share .41 .50 .73 .41 Diluted Earnings Per Share $ .41 $ .50 $ .73 $ .41 1996 Net Sales $2,041,496 $2,193,239 $2,459,008 $1,906,498 Gross Margin 552,301 566,166 628,792 476,500 Net Earnings 55,626 75,183 114,279 47,062 Basic Earnings Per Share 32 .43 .70 .29 Diluted Earnings Per Share $ .32 $ .43 $ .67 $ .29
* LIFO Adjustment: Fiscal 1997 - The total LIFO effect for the year was a credit of $7.0 million. A charge of $5.5 million was made against earnings through the first nine months, resulting in a fourth quarter credit of $12.5 million. Fiscal 1996 - The total LIFO effect for the year was a charge of $1.4 million. A charge of $10.5 million was made against earnings through the first nine months, resulting in a fourth quarter credit of $9.1 million. Appendix to EXHIBIT 13 Graphic and Image Material Page 1 Photo of Bob Tillman with following caption: "Bob Tillman at a Gold Advisory Board meeting." Page 2 Three candid photos of Bob Tillman and other business men with following caption: "Bob Tillman gets valuable input from customers at a Gold Advisory Board meeting. Page 11 Table Lowe's Total Market Potential Dollars in Billions Home Center Market Building Contractor Home Owner New Housing R&R* DIY HH Appliances+ Total 2002e $81.5 $46.7 $123.4 $33.5 $285.1 2001e 79.9 46.1 118.9 32.5 277.4 2000e 77.9 45.3 114.6 31.4 269.2 1999e 75.6 43.8 110.5 30.4 260.3 1998e 72.4 42.2 106.0 29.7 250.3 1997e 70.2 40.7 101.7 29.0 241.6 1996 67.8 37.8 95.5 27.8 228.9 1995 62.0 37.3 89.8 27.2 216.3 1994 61.4 38.0 86.9 25.6 211.9 1993 52.3 35.6 79.0 24.0 190.9 1992 45.5 33.0 73.9 22.2 174.6 1991 38.9 31.6 68.4 21.6 160.5 1990 45.1 35.7 69.8 22.4 173.0 1985 40.3 25.4 53.1 19.8 138.6 1980 24.4 15.6 38.1 15.1 93.2 *R&R = Repair and Remodel e = estimate +Kitchen and Household Appliances Sources: Home Improvement Research Institute; Management Horizons Page 12 "Lowe's Stores" map and table describing location of Lowe's stores. State # of stores Alabama 17 Arkansas 8 Delaware 3 Florida 20 Georgia 22 Illinois 12 Indiana 18 Iowa 5 Kansas 1 Kentucky 20 Louisiana 13 Maryland 11 Michigan 8 Mississippi 8 Missouri 5 North Carolina 68 New York 5 Ohio 37 Oklahoma 9 Pennsylvania 20 South Carolina 25 Tennessee 28 Texas 36 Virginia 35 West Virginia 12 Table Merchandise Sales Trends Dollars in Millions Base Year 1997 1996 1995 1992 Total Sales Total Total Total Total 5-Year CGR Sales % Sales % Sales % Sales % Category + 8% 1.Structural Lumber $ 939 9 $ 815 9 $ 839 12 $ 637 16 +12 2.Building Commodities & Millwork 1,974 19 1,866 21 1,508 22 1,101 29 +36 3.Home Decor 700 7 528 6 388 5 149 4 +19 4.Major Appliances/ & Kitchens 1,102 11 992 12 871 12 457 12 +32 5.Paint & Sundries 791 8 645 8 493 7 201 5 +29 6.Plumbing 938 9 776 9 607 9 266 7 +30 7.Electrical 879 9 707 8 559 8 240 6 +32 8.Power Tools 609 6 487 6 364 5 154 4 +28 9.Hardware 572 6 493 6 386 5 167 4 +26 10.Nursery & Gardening 942 9 728 8 610 9 291 8 +30 11.Outdoor Hardlines 691 7 563 7 450 6 183 5 +21% Totals $10,137 100 $8,600 100 $7,075 100 $3,846 100 Page 14 Individual photos of each the thirteen members of the board of directors. Page 15 Photo of Petro Kulynych with the following caption: "Petro Kulynych was hired as Lowe's first bookkeeper in 1946. Energetic and dedicated, he worked with Carl Buchan to establish Lowe's as an innovative force in building supply retailing. He grew with the Company and retired as a managing director in 1983, remaining on the board as a regular member until 1997. His outstanding career inspires thousands of Lowe's employees to this day." Photo of Russell B. Long with the following caption: "Russell B. Long is one of Louisiana's best-known native sons. He served his state as a U.S. Senator for nearly forty years, rising through the ranks to chair the Senate Finance Committee, where he became the leading Congressional champion of Employee Stock Ownership Plans. In 1987, he brought his wisdom and trademark sense of humor to Lowe's board of directors. He retired from the board in 1997." Page 22 Sales graph located under the Statement of Earnings depicting the following information: Lowe's Sales Growth $ Billions Fiscal year Sales 1990 $ 2.83 1991 3.06 1992 3.85 1993 4.54 1994 6.11 1995 7.08 1996 8.60 1997 10.14 Page 34: Table Lowe's Quarterly Stock Price Range and Cash Dividends Fiscal 1997 Fiscal 1996 Fiscal 1995 High Low Dividend High Low Dividend High Low Dividend 1st Quarter $40 1/4 $32 3/8 $.055 $36 1/4 $29 3/8 $.050 $38 7/8 $27 1/2 $.045 2nd Quarter 39 7/8 33 11/16 .055 39 28 5/8 .050 37 1/4 26 .045 3rd Quarter 44 5/16 33 15/16 .055 43 5/16 32 3/8 .050 37 7/8 26 1/4 .050 4th Quarter $51 9/16 $41 9/16 .055 $43 1/2 $31 5/8 $.055 $34 7/8 $27 7/8 $.050 EX-21 4 Part IV EXHIBIT 21 - SCHEDULE OF SUBSIDIARIES LOWE'S COMPANIES, INC. AND SUBSIDIARY COMPANIES NAME AND DOING BUSINESS AS: STATE OF INCORPORATION Lowe's Home Centers, Inc. North Carolina The Contractor Yard, Inc. North Carolina Sterling Advertising, Ltd. North Carolina LF Corporation Delaware Lowe's Home Centres (Canada), Inc. Canada LG Sourcing, Inc. North Carolina EX-23 5 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT Lowe's Companies, Inc. We consent to the incorporation by reference in Post-Effective Amendment No. 1 to Registration Statement No. 33-2618 on Form S-8, Registration Statement No. 33-54497 on Form S-8, Registration Statement No. 33-54499 on Form S-8, and Registration Statement No. 333-34631 on Form S-8, of our report dated February 19, 1998 appearing in or incorporated by reference in this Annual Report on Form 10-K of Lowe's Companies, Inc. for the year ended January 30, 1998. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Charlotte, North Carolina April 24, 1998 EX-27 6
5 0000060667 LOWES COMPANIES INC 1000 YEAR JAN-30-1998 JAN-30-1998 195,146 16,155 118,408 0 1,714,592 2,109,602 3,005,199 0 5,219,277 1,449,320 0 0 0 87,658 2,512,951 5,219,277 10,136,890 10,136,890 7,447,117 7,447,117 2,065,659 0 65,567 558,547 201,063 357,484 0 0 0 357,484 0 2.05
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