EXHIBIT 13
Page 11:
United States map showing states with Lowe's and Eagle stores shaded.
"Lowe's Stores" table showing number of Lowe's stores in each applicable
state.
State Number of stores
Alabama 19
Arkansas 8
Connecticut 3
Delaware 4
Florida 25
Georgia 22
Illinois 14
Indiana 19
Iowa 5
Kansas 2
Kentucky 20
Louisiana 12
Maryland 11
Michigan 9
Mississippi 7
Missouri 5
North Carolina 69
New Jersey 1
New York 8
Ohio 39
Oklahoma 9
Pennsylvania 25
South Carolina 28
Tennessee 32
Texas 41
Virginia 36
West Virginia 11
"Eagle Stores" table showing number of Eagle stores in each applicable
state.
State Number of stores
Alaska 1
California 3
Colorado 4
Hawaii 2
Idaho 1
Montana 1
Nevada 1
Oregon 1
Utah 4
Washington 18
Page 13:
Disclosure Regarding Forward-Looking Statements
Our Annual Report talks about our future, particularly in the "Letter to
Shareholders" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." While we believe our expectations are reasonable,
we can't guarantee them and you should consider this when thinking about
statements we make that aren't historical facts. Some of the things that
could cause our actual results to differ substantially from our expectations
are:
* Our sales are dependent upon 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 impact sales
because much of our inventory is purchased for discretionary projects, which
can be delayed.
* Our expansion strategy may be impacted by environmental regulations,
local zoning issues and delays, availability and development of land, and more
stringent land use regulations than we have traditionally experienced.
* Many of our products are commodities whose prices fluctuate erratically
within an economic cycle, a condition true of lumber and plywood.
* Our business is highly competitive, and as we expand to larger
markets we may face new forms of competition which do not exist in some of the
markets we have traditionally served.
* The ability to continue our everyday competitive pricing strategy and
provide the products that consumers want depends on our vendors providing a
reliable supply of inventory at competitive prices.
* On a short-term basis, weather may impact sales of product groups like
lawn and garden, lumber, and building materials.
Page 14:
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 29, 1999 and January 30, 1998,
and the related consolidated statements of earnings, shareholders' equity,
and cash flows for each of the three fiscal years in the period ended January
29, 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 29, 1999 and January 30, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended January 29, 1999 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Charlotte, North Carolina
February 19, 1999
Pages 15 - 18:
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 29, 1999 (i.e., fiscal years 1998,
1997 and 1996). This discussion should be read in conjunction with the
Letter to Shareholders, financial statements, and financial statement
footnotes included in this annual report.
OPERATIONS
Net earnings for 1998 increased 35% to $482.4 million or 3.9% of sales
compared to $357.5 million or 3.5% of sales for 1997. Net earnings,
calculated on a FIFO basis, would show an increase of 31% for 1998. Diluted
earnings per share were $1.36 for 1998 compared to $1.03 for 1997 and $.86
for 1996. Return on beginning assets was 9.2% for 1998 compared to 8.1% for
1997; and return on beginning shareholders' equity was 18.6% for 1998
compared to 16.1% for 1997.
The Company's sales were $12.2 billion in 1998, a 21% increase over 1997
sales of $10.1 billion. Sales for 1997 were 18% higher than 1996 levels.
Comparable store sales increased 6% in 1998 and large store (stores exceeding
80,000 square feet) comparable sales increased 7% for the year. The
increases in sales are attributable to the Company's ongoing store expansion
and relocation program along with the growth in comparable store sales.
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:
1998 1997 1996
Sales (in millions) $12,245 $10,137 $8,600
Sales Increases 21% 18% 22%
Comparable Store Sales Increases 6% 4% 7%
At end of year:
Stores 484 446 402
Sales Floor Square Feet (in millions) 43.4 36.5 30.4
Average Store Size Square
Feet (in thousands) 90 82 76
Gross margin in 1998 was 26.9% of sales compared to 26.5% in 1997. Both
of these years showed improvement over the 25.9% rate achieved in 1996.
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 gross
margin improvements. Additionally, in 1996, the Company reduced its exposure
in lower margin consumer electronics and replaced these items with less
seasonal, higher margin, products, which has increased gross margin. The
Company recorded a LIFO credit of $29.0 million in 1998, compared to a $7.0
million credit in 1997 and a $1.4 million charge in 1996, increasing gross
margin by 17 basis points and 6 basis points in 1998 and 1997, respectively,
and decreasing gross margin by 1 basis point in 1996.
Selling, general and administrative expenses (SG&A) were $2.1 billion or
17.3% of sales in 1998. SG&A in the two previous years were $1.8 and $1.5
billion or 17.3% and 17.0% of sales, respectively. The 30 basis point
increase in 1997 resulted primarily from higher payroll levels at stores that
were new or relocated and increased costs relating to relocating or closing
stores.
Store opening costs were $71.7 million for 1998 compared to $70.0 and
$59.2 million in 1997 and 1996, respectively, and were expensed as incurred.
As a percentage of sales, store opening costs were 0.6% for 1998 and 0.7% for
both 1997 and 1996. These costs averaged approximately $900 thousand per
store in 1998.
Depreciation, reflecting continued fixed asset expansion, increased 13%
to $271.8 million in 1998, compared to increases of 22% and 32% in 1997 and
1996, respectively. Depreciation as a percentage of sales was 2.2% for 1998,
a slight decrease from 2.4% in 1997 and 2.3% in 1996. Approximately 39% of
new stores opened in the last three years have been leased, of which
approximately 44%, 30% and 93% in 1998, 1997 and 1996 were under capital
leases. Property, less accumulated depreciation, increased to $3.64 billion
at January 29, 1999 compared to $3.01 billion at January 30, 1998. The
increase in property resulted primarily from the Company's store expansion
program, including land, building, store equipment, fixtures and displays,
and investment in new distribution equipment.
Interest costs as a percent of sales were 0.6% for 1998, 1997 and 1996.
Interest costs totaled $75 million in 1998, $66 million in 1997 and $49
million in 1996. Interest costs relating to capital leases were $39.1, $38.3
and $29.1 million for 1998, 1997 and 1996, respectively. See the discussion
of liquidity and capital resources below.
The Company's effective income tax rates were 36.4%, 36.0% and 35.6% in
1998, 1997 and 1996, respectively. The higher rate in 1998 was primarily
related to expansion into states with higher state income tax rates. The
lower rate in 1996 was primarily due to the utilization of available state
net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
Primary sources of liquidity are cash flows from operating activities
and the sale of debt securities. Net cash provided by operating activities
was $696.8 million for 1998. This compared to $664.9 and $543.0 million in
1997 and 1996, respectively. The increase in net cash provided by operating
activities for 1998 is primarily related to increased earnings and various
operating liabilities offset by an increase in inventory, net of accounts
payable. The increase during 1997 resulted primarily from increased earnings
and smaller increases in inventory, net of accounts payable, from year to
year. Working capital at January 29, 1999 was $820.3 million compared to
$660.3 million at January 30, 1998.
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 $928 million for 1998. This compares
to $773 million and $677 million for 1997 and 1996, respectively. Retail
selling space as of January 29, 1999, totaling 43.4 million square feet,
represents an 18.8% increase over the selling space as of January 30, 1998.
The January 30, 1998 selling space total of 36.5 million square feet
represents a 20.3% increase over the 1996 total of 30.4 million square feet.
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 1998, 1997 and 1996, the
Company acquired fixed assets (primarily new store facilities) under capital
leases of $47.3, $32.7 and $182.7 million, respectively.
Cash flows provided by financing activities were $236.5, $221.7 and
$11.9 million in 1998, 1997 and 1996, respectively. The major cash
components of financing activities in 1998 included the issuance of $300
million principal amount of 6.875% Debentures due February 15, 2028, $50.8
million of cash dividend payments and $15.5 million of scheduled debt
repayments. In 1997, financing activities included the issuance of $268
million aggregate principal of Medium Term Notes (MTN's) with final
maturities ranging from September 1, 2007 to May 15, 2037, cash dividend
payments of $28.7 million and $32.8 million of scheduled debt repayments.
The interest rates on the MTN's range from 6.07% to 7.61% and 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. The major
financing activities for 1996 included the non-cash conversion of $284.7
million principal amount of 3% Convertible Subordinated Notes into common
stock and $34.7 million in cash dividend payments. The ratio of long-term
debt to equity plus long-term debt was 29.0%, 28.7% and 25.7% as of year-end
1998, 1997 and 1996, respectively. The increases in 1998 and 1997 were
primarily due to the issuance of debt securities as previously described.
In February 1999, the Company issued $400 million principal of 6.5%
Debentures due March 15, 2029 in a private offering. In March 1999, the
Company also issued 6,206,895 shares of common stock in a public offering.
The net proceeds from the stock offering were approximately $348.1 million.
The shares were issued under a shelf registration statement filed with the
Securities and Exchange Commission in December 1997.
At January 29, 1999, the Company had a $300 million revolving credit
facility with a syndicate of eleven banks, available lines of credit
aggregating $278 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 29, 1999, outstanding letters of credit aggregated
$80.1 million. The revolving credit facility has $100 million expiring in
November 1999, with the remaining $200 million expiring in November 2001. In
addition, the Company has a $100 million revolving credit and security
agreement from a financial institution with $92.5 million outstanding at
January 29, 1999.
The Company's 1999 capital budget is currently at $1.6 billion,
inclusive of approximately $214 million of operating or capital leases. More
than 80% of this planned commitment is for store expansion. Expansion plans
for 1999 consist of approximately 80 to 85 stores (including the relocation
of 30 to 35 older, smaller format stores). This planned expansion is
expected to increase sales floor square footage by approximately 18%.
Approximately 15% of the 1999 projects will be leased and 85% will be owned.
Additionally, the Company has entered into an agreement with a lessor to
build a one million square foot regional distribution center in Pennsylvania,
which is expected to be operational in Spring 1999. In addition, a 195
thousand square foot specialty distribution center will be located at the
same site. At January 29, 1999, the Company operated four regional
distribution centers and nine smaller support facilities. The Company
believes that funds from operations, funds from equity and debt issuances,
leases and existing short-term credit agreements will be adequate to finance
the 1999 expansion plan and other operating needs.
In November 1998, the Company entered into a merger agreement to
acquire Eagle Hardware and Garden, Inc. (Eagle) in a stock-for-stock
acquisition, which was completed April 2, 1999. The transaction was valued
at approximately $1 billion, structured as a tax-free exchange of the
Company's common stock for Eagle's common stock, and accounted for as a
pooling of interests. Summary, combined company, pro forma financial
information for 1998, 1997 and 1996 is included in Note 14 of the
consolidated financial statements.
General inflation has not had a material impact on the Company during
the past three years. As noted above, the LIFO credit was $29.0 and $7.0
million in 1998 and 1997, respectively. This compares to a charge of $1.4
million in 1996. Overall inventory deflation was 1.69% and .99% for 1998 and
1997, respectively. There was overall inventory inflation of .15% for 1996.
MARKET RISK
The Company had no derivative financial instruments at January 29, 1999
or January 30, 1998.
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 29, 1999, long-term investments consisted of $28.7 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 outflows and related interest rates by 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.
YEAR 2000
The Year 2000 problem arose because many existing computer programs
and embedded computer chips use only the last two digits to refer to a year.
If not addressed, computer programs that are date sensitive may not have the
ability to properly recognize dates in year 2000 and beyond. The result
could be a disruption of operations and the processing of transactions.
In 1997 and 1998, the Company completed an analysis of the impact and
costs relating to the Year 2000 problem and developed an implementation plan
to address information technology (IT), non-information technology (non-IT)
and third party readiness issues.
In preparing IT systems for the Year 2000, the Company has utilized both
internal and external resources. Contracted programming costs to convert the
Company's IT systems during 1997, 1998 and 1999 are estimated to total
approximately $5 million and are being expensed as incurred, the majority of
which had been incurred through January 29, 1999. In addition, approximately
$19 million of computer hardware is being purchased to replace non-compliant
computer hardware. These purchases are expected to be completed by May 1999.
The cost of new hardware is being capitalized and depreciated over useful
lives ranging from 3 to 5 years. Cash flow from operations is the Company's
source of funding all Year 2000 costs. The incremental cost to convert
systems has been mitigated by substantial investments in new computer systems
over the past six years. During this period, new computer systems have been
developed or purchased including, but not limited to, these applications:
Distribution, Electronic Data Interchange, Payroll and Human Resources,
General Ledger, Accounts Payable, Forecasting and Replenishment, and Supply
Services. All of these new systems are Year 2000 compliant. At January 29,
1999, the Company's conversion of internally developed legacy systems was
completed with certification testing planned to be completed by the fall of
1999.
Regarding non-IT related risks, each functional area of the Company is
responsible for identifying these issues. Within each business function,
objectives are being prioritized and evaluated for risk of Year 2000
problems. Examples of potential non-IT risks of Year 2000 problems would be
power outages and failures of communication systems, bar code readers and
security devices. For most of the Company's stores, back-up generators are
already in place, which would mitigate temporary power outages. By mid 1999,
similar remediation and/or contingency plans will be developed by the
respective business functions for non-IT Year 2000 risks impacting all high
priority and critical business objectives.
In regards to third party readiness, the Company mailed Year 2000
questionnaires to all identified third parties (merchandise vendors and other
entities with which the Company conducts business) in order to assess whether
they are Year 2000 compliant or have adequately addressed their system
conversion requirements. Of the approximate six thousand questionnaires
mailed, 33% of the recipients have currently responded. Specific follow-up
letters are being sent to those with unacceptable responses and a second
mailing to non-respondents will be conducted in April 1999 followed by phone
calls for those not responding within thirty days. The Company cannot
predict how many of the responses received may prove later to be inaccurate
or overly optimistic. To address this uncertainty, the Company is developing
contingency plans to address unanticipated interruptions or down time in both
the Company's and third parties' systems and services.
The Company is continuing to closely monitor adherence to the remainder
of its Year 2000 implementation plan and is currently satisfied that it will
be completed by Fall 1999. For the remainder of the project, the Company's
efforts will be devoted to five primary areas:
* certification testing of IT systems to ensure Year 2000 compliance,
* contingency plan development for business areas as well as IT systems,
* continued follow-up to questionnaires sent to third parties,
* replacement of certain older model personal computers and point-of-
sale equipment, and
* updating some of the purchased software packages with Year 2000
compliant upgrades.
If the Company encounters unforeseen complications or issues not previously
addressed in the comprehensive plan, additional resources from internal and
external sources will be committed to complete the project by the planned
completion time of Fall 1999. Since the use of these additional resources is
considered unlikely, no estimates as to their costs have been made at this
time.
The Company believes that its compliance plan should mitigate any adverse
effect on its business from the Year 2000 problem. However, if:
* the implementation of the plan is not completed on time,
* the Company has failed to identify and fix material non-complying
equipment or software, or
* third parties are unable to fulfill significant commitments to the
Company as a result of their failure to effectively address their
Year 2000 problems,
the Company's ability to carry out its business could be adversely affected.
For example, if the Company's IT and non-IT systems are unable to process
transactions in the stores or on a regional or company-wide basis, the
Company could be forced to process these transactions manually. The volume
of business the Company could transact, and its sales and income, would be
reduced until it was able to develop alternatives to defective systems or
non-complying vendors. These reductions could occur at individual stores or
in clusters of stores sharing defective systems or non-complying vendors.
The effect of any failures on the Company's results of operations would
depend, of course, upon the extent of any non-compliance and its impact on
critical business systems and sources of supply, but could be significant.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. SFAS 133 is effective for the Company in the year beginning January
29, 2000. SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. Management is currently evaluating the impact of
the adoption of SFAS 133 and its effect on the Company's financial
statements.
Pages 19 - 31:
LOWE'S COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997
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 operated 484 stores in 27 states at January 29, 1999 predominantly
located in the eastern half of the United States. Below are those accounting
policies considered to be significant.
Stock Split - On May 29, 1998, the Board of Directors declared a two-for-one
stock split on the Company's common stock. One additional share was issued on
June 26, 1998 for each share held by shareholders of record on June 12, 1998.
The accompanying consolidated financial statements, including per share data,
have been adjusted to reflect the effect of the stock split.
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 years ended January 29, 1999 and January 30, 1998 each
had 52 weeks. All references herein for the years 1998, 1997 and 1996
represent the fiscal years ended January 29, 1999, January 30, 1998 and
January 31, 1997, 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 date 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 market value. Unrealized gains and losses on such
securities are included in accumulated other comprehensive income in
shareholders' equity.
Derivatives - The Company does not use derivative financial instruments for
trading purposes. Interest rate swap and cap agreements, which are
occasionally used by the Company in the management of interest rate exposure,
are accounted for on a settlement basis. Income and expense are recorded in
the same category as that arising from the related liability. The Company had
no such derivative financial instruments as of January 29, 1999 or 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 $2.0 and $1.6 million at January 29, 1999
and January 30, 1998, 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
Costs are certain costs associated with the preparation of inventory for
resale. If the FIFO method had been used, inventories would have been $38.6
and $67.6 million higher at January 29, 1999 and January 30, 1998,
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.
Impairment/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 becomes impaired, a provision is provided for the
present value of future lease obligations, net of anticipated sublease income.
Provisions for impairment and store closing costs are included in selling,
general and administrative expenses.
The estimated realizable value of closed store real estate is included in other
assets and amounted to $62.3 and $45.4 million at January 29, 1999 and January
30, 1998, respectively.
Advertising - Costs associated with advertising are charged to operations as
incurred. Advertising expenses were $110.1, $125.6 and $99.8 million for
1998, 1997 and 1996, respectively.
Recent Accounting Pronouncements - Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133) was issued in June 1998. SFAS 133 is effective for the Company in the
year beginning January 29, 2000. SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. Management is currently evaluating
the impact of the adoption of SFAS 133 and its effect on the Company's
financial statements.
NOTE 3 - Property and Accumulated Depreciation:
Property is summarized below by major class:
January 29, January 30,
1999 1998
(In Thousands)
Cost:
Land $ 946,203 $ 711,930
Buildings 1,841,658 1,533,954
Store, Distribution and Office Equipment 1,638,264 1,393,718
Leasehold Improvements 182,636 155,392
Total Cost 4,608,761 3,794,994
Accumulated Depreciation and Amortization (971,844) (789,795)
Net Property $3,636,917 $3,005,199
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 $464.0 and $438.4 million in assets under capital leases
at January 29, 1999 and January 30, 1998, respectively.
NOTE 4 - Short-Term Borrowings and Lines of Credit:
The Company has a $300 million revolving credit facility with a syndicate of
11 banks. The facility has $100 million expiring November 1999, 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. The revolving credit facility contains certain restrictive
covenants including maintenance of specific financial ratios. There were no
borrowings outstanding under this revolving credit facility as of January 29,
1999 or January 30, 1998.
Five banks have extended lines of credit aggregating $278.2 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 .19% to .50% per annum are paid on
the amounts of standby letters of credit used. At January 29, 1999,
outstanding letters of credit totaled $80.1 million.
A $100 million revolving credit and security agreement, expiring in September
1999 and renewable annually, is available from a financial institution.
Interest rates under this agreement are determined at the time of borrowing.
Under the current terms of the agreement, borrowings are based upon commercial
paper rates plus 21 basis points. At January 29, 1999 and January 30, 1998,
respectively, there were $92.5 and $98.1 million outstanding under this
credit and security agreement and $132.1 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.
There were no borrowings outstanding under these lines of credit as of January
29, 1999 or January 30, 1998.
The weighted average interest rate on short-term borrowings outstanding at
January 29, 1999 and January 30, 1998 was 4.96% and 5.73%, respectively.
NOTE 6 - Financial Instruments:
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 29, 1999 January 30, 1998___
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
Liabilities:
Long-Term Debt $1,382,111 $1,525,208 $1,058,048 $1,146,434
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.
NOTE 7 - Earnings Per Share:
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net earnings by the weighted-average number of common shares outstanding for
the period. Diluted EPS includes the dilutive effects of common stock
equivalents and convertible debt, as applicable. Following is the
reconciliation of EPS for 1998, 1997 and 1996.
(In Thousands, Except Per Share Data)
1998 1997 1996
Basic Earnings per Share:
Net Earnings $482,422 $357,484 $292,150
Weighted Average Shares Outstanding 352,104 348,554 335,199
Basic Earnings per Share $1.37 $1.03 $.87
Diluted Earnings per Share:
Net Earnings $482,422 $357,484 $292,150
Interest (After Taxes) on
Convertible Debt - - 3,620
Net Earnings, as Adjusted $482,422 $357,484 $295,770
Weighted Average Shares Outstanding 352,104 348,554 335,199
Dilutive Effect of Stock Options 1,691 205 158
Dilutive Effect of Convertible Debt - - 10,012
Weighted Average Shares, as Adjusted 353,795 348,759 345,369
Diluted Earnings per Share $1.36 $1.03 $.86
NOTE 8 - Shareholders' Equity:
Authorized shares of common stock were 1.4 billion at January 29, 1999 and
700 million at January 30, 1998 and January 31, 1997.
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 for $152.50. Each unit
is 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 commences a
tender offer for 15% or more of Lowe's common stock. The purchase rights are
not exercisable or transferable by the person or group acquiring the stock or
commencing the tender offer. The rights will expire on September 9, 2008,
unless the Company redeems or exchanges them earlier.
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 29, 1999, there were 285,050 and 6,869,614 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 at January 31, 1996 40 $19.38
Granted 2,430 $19.56
Canceled or Expired (20) $19.38
Outstanding at January 31, 1997 2,450 $19.56
Granted 1,494 $22.55
Canceled or Expired (20) $19.56
Exercised (4) $19.56
Outstanding at January 30, 1998 3,920 $20.70
Granted 1,736 $44.35
Canceled or Expired (249) $20.78
Exercised (621) $19.77
Outstanding at January 29, 1999 4,786 $29.40
Exercisable at January 29, 1999 1,620 $20.41
Of the 4,786,000 options outstanding at January 29, 1999, 3,054,000 options
had exercise prices per share ranging from $19.38 to $23.66 with a
weighted-average remaining term of 3.2 years. The remaining options
outstanding, totaling 1,732,000, had exercise prices per share ranging from
$34.78 to $45.00 with a weighted-average remaining term of 6.8 years. The
exercise prices per share of those options exercisable at January 29, 1999
range from $19.38 to $23.66.
Stock appreciation rights were denominated in units, which were comparable to
a share of common stock for purposes of determining the amount payable under
an award. An award entitled 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, generally three years. The final
value was the average closing price of a share of common stock during the last
month of the performance period. Limits were established with respect to the
amount payable on each unit. A total of 253,700 stock appreciation rights
were paid out at the maximum level of $1,902,750 during 1998 with no remaining
awards outstanding at January 29, 1999. The costs of these rights were
expensed over the performance periods and have reduced pre-tax earnings by
$0.3, $0.9 and $1.0 million in 1998, 1997 and 1996, respectively.
Restricted stock awards of 10,000, 870,700 and 777,100 shares, with per share
weighted-average fair values of $35.13, $24.80 and $16.57, were granted to
certain executives in 1998, 1997 and 1996, 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 1998, a total of 280,100
shares were forfeited and 164,950 shares became vested. At January 29, 1999,
grants totaling 1,548,750 shares are included in Shareholder's Equity and are
being amortized as earned over periods not exceeding seven years. Related
expense (charged to compensation expense) for 1998, 1997 and 1996 was $18.5,
$6.2 and $1.9 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 50,000 shares may be issued under this Plan. In 1998, 1997 and 1996,
12,000, 8,000 and 8,000 shares, respectively, were issued under this Plan.
Prior to its expiration in 1994, 280,000 stock options were granted under a
Non-Employee Directors' Stock Option Plan. In 1998 and 1997, 40,000 and
24,000 shares, respectively, were exercised under this Plan. There were no
exercises under the Plan in 1996. No shares were canceled under the Plan in
1998, 1997 or 1996. At January 29, 1999, 104,000 shares were exercisable. Of
the remaining outstanding options at January 29, 1999, the exercise price per
share ranges from $3.19 to $9.44 and their weighted-average remaining term is
2.6 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. Had compensation for 1998, 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 1998, 1997 and 1996 would approximate the following pro forma amounts
(in thousands, except per share data):
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the assumptions listed below.
1998 1997 1996_
Weighted average fair value per option $18.38 $9.30 $8.50
Assumptions used:
Weighted average expected volatility 31.6% 34.8% 38.3%
Weighted average expected dividend yield 0.35% 0.60% 0.66%
Weighted average risk-free interest rate 4.71% 6.04% 6.01%
Weighted average expected life, in years 6.9 5.0 5.0
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income (SFAS 130)." The Company reports
comprehensive income in its consolidated statement of shareholders' equity.
SFAS 130 requires the reporting of comprehensive income in addition to net
earnings from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that has not been historically recognized in the calculation of
net earnings.
For the three years ended January 29, 1999, unrealized holding gains
(losses) on available-for-sale securities is the only other comprehensive
income component for the Company. As required by SFAS 130 in the year of
adoption and forward, the following disclosures of unrealized net holding
gains are made for 1998.
Pre- Tax After
(In Thousands) Tax Expense Tax
Unrealized net holding gains
arising during the year $417 $177 $240
Less: Reclassification adjustment for
gains included in net earnings 17 6 11
Unrealized net gains on available-for-sale
securities, net of reclassification adjustment $400 $171 $229
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.
In August 1998, the Company entered into a $100 million operating lease
agreement for a distribution facility and store facilities. The initial lease
term is three years with two 1-year renewal options. The agreement contains
significant guaranteed residual values and purchase options at original cost
for all properties under the agreement.
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:
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. 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 1998, 1997 and 1996 was $80.3, $63.1 and
$61.1 million, respectively.
At January 29, 1999, the Employee Stock Ownership Trust held approximately
9.3% 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 1998, 1997 and 1996 were
$10.6, $8.7 and $7.2 million, respectively. The Company's common stock is an
investment option for participants in the ESIP. Shares held in the ESIP are
voted by the trustee as directed by an administrative committee of the ESIP.
NOTE 12 - 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 15 - Subsequent Events (Unaudited):
In February 1999, the Company issued $400 million principal of 6.5% Debentures
due March 15, 2029. The debentures were issued at an original price of
$986.47 per $1000 principal amount, which represented an original discount of
.478% and underwriters' discount of .875%. The debentures may not be redeemed
prior to maturity.
In March 1999, the Company issued 6,206,895 shares of common stock in a public
offering. The net proceeds from the stock offering were approximately $348.1
million. The shares were issued under a shelf registration statement filed
with the Securities and Exchange Commission in December 1997.
Page 32:
Page 33:
Page 11:
United States map showing states with Lowe's and Eagle stores shaded.
"Lowe's Stores" table showing number of Lowe's stores in each applicable
state.
State Number of stores
Alabama 19
Arkansas 8
Connecticut 3
Delaware 4
Florida 25
Georgia 22
Illinois 14
Indiana 19
Iowa 5
Kansas 2
Kentucky 20
Louisiana 12
Maryland 11
Michigan 9
Mississippi 7
Missouri 5
North Carolina 69
New Jersey 1
New York 8
Ohio 39
Oklahoma 9
Pennsylvania 25
South Carolina 28
Tennessee 32
Texas 41
Virginia 36
West Virginia 11
"Eagle Stores" table showing number of Eagle stores in each applicable
state.
State Number of stores
Alaska 1
California 3
Colorado 4
Hawaii 2
Idaho 1
Montana 1
Nevada 1
Oregon 1
Utah 4
Washington 18
Page 13:
Disclosure Regarding Forward-Looking Statements
Our Annual Report talks about our future, particularly in the "Letter to
Shareholders" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." While we believe our expectations are reasonable,
we can't guarantee them and you should consider this when thinking about
statements we make that aren't historical facts. Some of the things that
could cause our actual results to differ substantially from our expectations
are:
* Our sales are dependent upon 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 impact sales
because much of our inventory is purchased for discretionary projects, which
can be delayed.
* Our expansion strategy may be impacted by environmental regulations,
local zoning issues and delays, availability and development of land, and more
stringent land use regulations than we have traditionally experienced.
* Many of our products are commodities whose prices fluctuate erratically
within an economic cycle, a condition true of lumber and plywood.
* Our business is highly competitive, and as we expand to larger
markets we may face new forms of competition which do not exist in some of the
markets we have traditionally served.
* The ability to continue our everyday competitive pricing strategy and
provide the products that consumers want depends on our vendors providing a
reliable supply of inventory at competitive prices.
* On a short-term basis, weather may impact sales of product groups like
lawn and garden, lumber, and building materials.
Page 14:
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 29, 1999 and January 30, 1998,
and the related consolidated statements of earnings, shareholders' equity,
and cash flows for each of the three fiscal years in the period ended January
29, 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 29, 1999 and January 30, 1998, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended January 29, 1999 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Charlotte, North Carolina
February 19, 1999
Pages 15 - 18:
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 29, 1999 (i.e., fiscal years 1998,
1997 and 1996). This discussion should be read in conjunction with the
Letter to Shareholders, financial statements, and financial statement
footnotes included in this annual report.
OPERATIONS
Net earnings for 1998 increased 35% to $482.4 million or 3.9% of sales
compared to $357.5 million or 3.5% of sales for 1997. Net earnings,
calculated on a FIFO basis, would show an increase of 31% for 1998. Diluted
earnings per share were $1.36 for 1998 compared to $1.03 for 1997 and $.86
for 1996. Return on beginning assets was 9.2% for 1998 compared to 8.1% for
1997; and return on beginning shareholders' equity was 18.6% for 1998
compared to 16.1% for 1997.
The Company's sales were $12.2 billion in 1998, a 21% increase over 1997
sales of $10.1 billion. Sales for 1997 were 18% higher than 1996 levels.
Comparable store sales increased 6% in 1998 and large store (stores exceeding
80,000 square feet) comparable sales increased 7% for the year. The
increases in sales are attributable to the Company's ongoing store expansion
and relocation program along with the growth in comparable store sales.
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:
1998 1997 1996
Sales (in millions) $12,245 $10,137 $8,600
Sales Increases 21% 18% 22%
Comparable Store Sales Increases 6% 4% 7%
At end of year:
Stores 484 446 402
Sales Floor Square Feet (in millions) 43.4 36.5 30.4
Average Store Size Square
Feet (in thousands) 90 82 76
Gross margin in 1998 was 26.9% of sales compared to 26.5% in 1997. Both
of these years showed improvement over the 25.9% rate achieved in 1996.
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 gross
margin improvements. Additionally, in 1996, the Company reduced its exposure
in lower margin consumer electronics and replaced these items with less
seasonal, higher margin, products, which has increased gross margin. The
Company recorded a LIFO credit of $29.0 million in 1998, compared to a $7.0
million credit in 1997 and a $1.4 million charge in 1996, increasing gross
margin by 17 basis points and 6 basis points in 1998 and 1997, respectively,
and decreasing gross margin by 1 basis point in 1996.
Selling, general and administrative expenses (SG&A) were $2.1 billion or
17.3% of sales in 1998. SG&A in the two previous years were $1.8 and $1.5
billion or 17.3% and 17.0% of sales, respectively. The 30 basis point
increase in 1997 resulted primarily from higher payroll levels at stores that
were new or relocated and increased costs relating to relocating or closing
stores.
Store opening costs were $71.7 million for 1998 compared to $70.0 and
$59.2 million in 1997 and 1996, respectively, and were expensed as incurred.
As a percentage of sales, store opening costs were 0.6% for 1998 and 0.7% for
both 1997 and 1996. These costs averaged approximately $900 thousand per
store in 1998.
Depreciation, reflecting continued fixed asset expansion, increased 13%
to $271.8 million in 1998, compared to increases of 22% and 32% in 1997 and
1996, respectively. Depreciation as a percentage of sales was 2.2% for 1998,
a slight decrease from 2.4% in 1997 and 2.3% in 1996. Approximately 39% of
new stores opened in the last three years have been leased, of which
approximately 44%, 30% and 93% in 1998, 1997 and 1996 were under capital
leases. Property, less accumulated depreciation, increased to $3.64 billion
at January 29, 1999 compared to $3.01 billion at January 30, 1998. The
increase in property resulted primarily from the Company's store expansion
program, including land, building, store equipment, fixtures and displays,
and investment in new distribution equipment.
Interest costs as a percent of sales were 0.6% for 1998, 1997 and 1996.
Interest costs totaled $75 million in 1998, $66 million in 1997 and $49
million in 1996. Interest costs relating to capital leases were $39.1, $38.3
and $29.1 million for 1998, 1997 and 1996, respectively. See the discussion
of liquidity and capital resources below.
The Company's effective income tax rates were 36.4%, 36.0% and 35.6% in
1998, 1997 and 1996, respectively. The higher rate in 1998 was primarily
related to expansion into states with higher state income tax rates. The
lower rate in 1996 was primarily due to the utilization of available state
net operating losses.
LIQUIDITY AND CAPITAL RESOURCES
Primary sources of liquidity are cash flows from operating activities
and the sale of debt securities. Net cash provided by operating activities
was $696.8 million for 1998. This compared to $664.9 and $543.0 million in
1997 and 1996, respectively. The increase in net cash provided by operating
activities for 1998 is primarily related to increased earnings and various
operating liabilities offset by an increase in inventory, net of accounts
payable. The increase during 1997 resulted primarily from increased earnings
and smaller increases in inventory, net of accounts payable, from year to
year. Working capital at January 29, 1999 was $820.3 million compared to
$660.3 million at January 30, 1998.
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 $928 million for 1998. This compares
to $773 million and $677 million for 1997 and 1996, respectively. Retail
selling space as of January 29, 1999, totaling 43.4 million square feet,
represents an 18.8% increase over the selling space as of January 30, 1998.
The January 30, 1998 selling space total of 36.5 million square feet
represents a 20.3% increase over the 1996 total of 30.4 million square feet.
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 1998, 1997 and 1996, the
Company acquired fixed assets (primarily new store facilities) under capital
leases of $47.3, $32.7 and $182.7 million, respectively.
Cash flows provided by financing activities were $236.5, $221.7 and
$11.9 million in 1998, 1997 and 1996, respectively. The major cash
components of financing activities in 1998 included the issuance of $300
million principal amount of 6.875% Debentures due February 15, 2028, $50.8
million of cash dividend payments and $15.5 million of scheduled debt
repayments. In 1997, financing activities included the issuance of $268
million aggregate principal of Medium Term Notes (MTN's) with final
maturities ranging from September 1, 2007 to May 15, 2037, cash dividend
payments of $28.7 million and $32.8 million of scheduled debt repayments.
The interest rates on the MTN's range from 6.07% to 7.61% and 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. The major
financing activities for 1996 included the non-cash conversion of $284.7
million principal amount of 3% Convertible Subordinated Notes into common
stock and $34.7 million in cash dividend payments. The ratio of long-term
debt to equity plus long-term debt was 29.0%, 28.7% and 25.7% as of year-end
1998, 1997 and 1996, respectively. The increases in 1998 and 1997 were
primarily due to the issuance of debt securities as previously described.
In February 1999, the Company issued $400 million principal of 6.5%
Debentures due March 15, 2029 in a private offering. In March 1999, the
Company also issued 6,206,895 shares of common stock in a public offering.
The net proceeds from the stock offering were approximately $348.1 million.
The shares were issued under a shelf registration statement filed with the
Securities and Exchange Commission in December 1997.
At January 29, 1999, the Company had a $300 million revolving credit
facility with a syndicate of eleven banks, available lines of credit
aggregating $278 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 29, 1999, outstanding letters of credit aggregated
$80.1 million. The revolving credit facility has $100 million expiring in
November 1999, with the remaining $200 million expiring in November 2001. In
addition, the Company has a $100 million revolving credit and security
agreement from a financial institution with $92.5 million outstanding at
January 29, 1999.
The Company's 1999 capital budget is currently at $1.6 billion,
inclusive of approximately $214 million of operating or capital leases. More
than 80% of this planned commitment is for store expansion. Expansion plans
for 1999 consist of approximately 80 to 85 stores (including the relocation
of 30 to 35 older, smaller format stores). This planned expansion is
expected to increase sales floor square footage by approximately 18%.
Approximately 15% of the 1999 projects will be leased and 85% will be owned.
Additionally, the Company has entered into an agreement with a lessor to
build a one million square foot regional distribution center in Pennsylvania,
which is expected to be operational in Spring 1999. In addition, a 195
thousand square foot specialty distribution center will be located at the
same site. At January 29, 1999, the Company operated four regional
distribution centers and nine smaller support facilities. The Company
believes that funds from operations, funds from equity and debt issuances,
leases and existing short-term credit agreements will be adequate to finance
the 1999 expansion plan and other operating needs.
In November 1998, the Company entered into a merger agreement to
acquire Eagle Hardware and Garden, Inc. (Eagle) in a stock-for-stock
acquisition, which was completed April 2, 1999. The transaction was valued
at approximately $1 billion, structured as a tax-free exchange of the
Company's common stock for Eagle's common stock, and accounted for as a
pooling of interests. Summary, combined company, pro forma financial
information for 1998, 1997 and 1996 is included in Note 14 of the
consolidated financial statements.
General inflation has not had a material impact on the Company during
the past three years. As noted above, the LIFO credit was $29.0 and $7.0
million in 1998 and 1997, respectively. This compares to a charge of $1.4
million in 1996. Overall inventory deflation was 1.69% and .99% for 1998 and
1997, respectively. There was overall inventory inflation of .15% for 1996.
MARKET RISK
The Company had no derivative financial instruments at January 29, 1999
or January 30, 1998.
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 29, 1999, long-term investments consisted of $28.7 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 outflows and related interest rates by 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.
YEAR 2000
The Year 2000 problem arose because many existing computer programs
and embedded computer chips use only the last two digits to refer to a year.
If not addressed, computer programs that are date sensitive may not have the
ability to properly recognize dates in year 2000 and beyond. The result
could be a disruption of operations and the processing of transactions.
In 1997 and 1998, the Company completed an analysis of the impact and
costs relating to the Year 2000 problem and developed an implementation plan
to address information technology (IT), non-information technology (non-IT)
and third party readiness issues.
In preparing IT systems for the Year 2000, the Company has utilized both
internal and external resources. Contracted programming costs to convert the
Company's IT systems during 1997, 1998 and 1999 are estimated to total
approximately $5 million and are being expensed as incurred, the majority of
which had been incurred through January 29, 1999. In addition, approximately
$19 million of computer hardware is being purchased to replace non-compliant
computer hardware. These purchases are expected to be completed by May 1999.
The cost of new hardware is being capitalized and depreciated over useful
lives ranging from 3 to 5 years. Cash flow from operations is the Company's
source of funding all Year 2000 costs. The incremental cost to convert
systems has been mitigated by substantial investments in new computer systems
over the past six years. During this period, new computer systems have been
developed or purchased including, but not limited to, these applications:
Distribution, Electronic Data Interchange, Payroll and Human Resources,
General Ledger, Accounts Payable, Forecasting and Replenishment, and Supply
Services. All of these new systems are Year 2000 compliant. At January 29,
1999, the Company's conversion of internally developed legacy systems was
completed with certification testing planned to be completed by the fall of
1999.
Regarding non-IT related risks, each functional area of the Company is
responsible for identifying these issues. Within each business function,
objectives are being prioritized and evaluated for risk of Year 2000
problems. Examples of potential non-IT risks of Year 2000 problems would be
power outages and failures of communication systems, bar code readers and
security devices. For most of the Company's stores, back-up generators are
already in place, which would mitigate temporary power outages. By mid 1999,
similar remediation and/or contingency plans will be developed by the
respective business functions for non-IT Year 2000 risks impacting all high
priority and critical business objectives.
In regards to third party readiness, the Company mailed Year 2000
questionnaires to all identified third parties (merchandise vendors and other
entities with which the Company conducts business) in order to assess whether
they are Year 2000 compliant or have adequately addressed their system
conversion requirements. Of the approximate six thousand questionnaires
mailed, 33% of the recipients have currently responded. Specific follow-up
letters are being sent to those with unacceptable responses and a second
mailing to non-respondents will be conducted in April 1999 followed by phone
calls for those not responding within thirty days. The Company cannot
predict how many of the responses received may prove later to be inaccurate
or overly optimistic. To address this uncertainty, the Company is developing
contingency plans to address unanticipated interruptions or down time in both
the Company's and third parties' systems and services.
The Company is continuing to closely monitor adherence to the remainder
of its Year 2000 implementation plan and is currently satisfied that it will
be completed by Fall 1999. For the remainder of the project, the Company's
efforts will be devoted to five primary areas:
* certification testing of IT systems to ensure Year 2000 compliance,
* contingency plan development for business areas as well as IT systems,
* continued follow-up to questionnaires sent to third parties,
* replacement of certain older model personal computers and point-of-
sale equipment, and
* updating some of the purchased software packages with Year 2000
compliant upgrades.
If the Company encounters unforeseen complications or issues not previously
addressed in the comprehensive plan, additional resources from internal and
external sources will be committed to complete the project by the planned
completion time of Fall 1999. Since the use of these additional resources is
considered unlikely, no estimates as to their costs have been made at this
time.
The Company believes that its compliance plan should mitigate any adverse
effect on its business from the Year 2000 problem. However, if:
* the implementation of the plan is not completed on time,
* the Company has failed to identify and fix material non-complying
equipment or software, or
* third parties are unable to fulfill significant commitments to the
Company as a result of their failure to effectively address their
Year 2000 problems,
the Company's ability to carry out its business could be adversely affected.
For example, if the Company's IT and non-IT systems are unable to process
transactions in the stores or on a regional or company-wide basis, the
Company could be forced to process these transactions manually. The volume
of business the Company could transact, and its sales and income, would be
reduced until it was able to develop alternatives to defective systems or
non-complying vendors. These reductions could occur at individual stores or
in clusters of stores sharing defective systems or non-complying vendors.
The effect of any failures on the Company's results of operations would
depend, of course, upon the extent of any non-compliance and its impact on
critical business systems and sources of supply, but could be significant.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June
1998. SFAS 133 is effective for the Company in the year beginning January
29, 2000. SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those
instruments at fair value. Management is currently evaluating the impact of
the adoption of SFAS 133 and its effect on the Company's financial
statements.
Pages 19 - 31:
LOWE'S COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 29, 1999, JANUARY 30, 1998 AND JANUARY 31, 1997
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 operated 484 stores in 27 states at January 29, 1999 predominantly
located in the eastern half of the United States. Below are those accounting
policies considered to be significant.
Stock Split - On May 29, 1998, the Board of Directors declared a two-for-one
stock split on the Company's common stock. One additional share was issued on
June 26, 1998 for each share held by shareholders of record on June 12, 1998.
The accompanying consolidated financial statements, including per share data,
have been adjusted to reflect the effect of the stock split.
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 years ended January 29, 1999 and January 30, 1998 each
had 52 weeks. All references herein for the years 1998, 1997 and 1996
represent the fiscal years ended January 29, 1999, January 30, 1998 and
January 31, 1997, 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 date 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 market value. Unrealized gains and losses on such
securities are included in accumulated other comprehensive income in
shareholders' equity.
Derivatives - The Company does not use derivative financial instruments for
trading purposes. Interest rate swap and cap agreements, which are
occasionally used by the Company in the management of interest rate exposure,
are accounted for on a settlement basis. Income and expense are recorded in
the same category as that arising from the related liability. The Company had
no such derivative financial instruments as of January 29, 1999 or 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 $2.0 and $1.6 million at January 29, 1999
and January 30, 1998, 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
Costs are certain costs associated with the preparation of inventory for
resale. If the FIFO method had been used, inventories would have been $38.6
and $67.6 million higher at January 29, 1999 and January 30, 1998,
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.
Impairment/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 becomes impaired, a provision is provided for the
present value of future lease obligations, net of anticipated sublease income.
Provisions for impairment and store closing costs are included in selling,
general and administrative expenses.
The estimated realizable value of closed store real estate is included in other
assets and amounted to $62.3 and $45.4 million at January 29, 1999 and January
30, 1998, respectively.
Advertising - Costs associated with advertising are charged to operations as
incurred. Advertising expenses were $110.1, $125.6 and $99.8 million for
1998, 1997 and 1996, respectively.
Recent Accounting Pronouncements - Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133) was issued in June 1998. SFAS 133 is effective for the Company in the
year beginning January 29, 2000. SFAS 133 requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. Management is currently evaluating
the impact of the adoption of SFAS 133 and its effect on the Company's
financial statements.
NOTE 3 - Property and Accumulated Depreciation:
Property is summarized below by major class:
January 29, January 30,
1999 1998
(In Thousands)
Cost:
Land $ 946,203 $ 711,930
Buildings 1,841,658 1,533,954
Store, Distribution and Office Equipment 1,638,264 1,393,718
Leasehold Improvements 182,636 155,392
Total Cost 4,608,761 3,794,994
Accumulated Depreciation and Amortization (971,844) (789,795)
Net Property $3,636,917 $3,005,199
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 $464.0 and $438.4 million in assets under capital leases
at January 29, 1999 and January 30, 1998, respectively.
NOTE 4 - Short-Term Borrowings and Lines of Credit:
The Company has a $300 million revolving credit facility with a syndicate of
11 banks. The facility has $100 million expiring November 1999, 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. The revolving credit facility contains certain restrictive
covenants including maintenance of specific financial ratios. There were no
borrowings outstanding under this revolving credit facility as of January 29,
1999 or January 30, 1998.
Five banks have extended lines of credit aggregating $278.2 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 .19% to .50% per annum are paid on
the amounts of standby letters of credit used. At January 29, 1999,
outstanding letters of credit totaled $80.1 million.
A $100 million revolving credit and security agreement, expiring in September
1999 and renewable annually, is available from a financial institution.
Interest rates under this agreement are determined at the time of borrowing.
Under the current terms of the agreement, borrowings are based upon commercial
paper rates plus 21 basis points. At January 29, 1999 and January 30, 1998,
respectively, there were $92.5 and $98.1 million outstanding under this
credit and security agreement and $132.1 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.
There were no borrowings outstanding under these lines of credit as of January
29, 1999 or January 30, 1998.
The weighted average interest rate on short-term borrowings outstanding at
January 29, 1999 and January 30, 1998 was 4.96% and 5.73%, respectively.
NOTE 6 - Financial Instruments:
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 29, 1999 January 30, 1998___
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
Liabilities:
Long-Term Debt $1,382,111 $1,525,208 $1,058,048 $1,146,434
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.
NOTE 7 - Earnings Per Share:
Basic earnings per share (EPS) excludes dilution and is computed by dividing
net earnings by the weighted-average number of common shares outstanding for
the period. Diluted EPS includes the dilutive effects of common stock
equivalents and convertible debt, as applicable. Following is the
reconciliation of EPS for 1998, 1997 and 1996.
(In Thousands, Except Per Share Data)
1998 1997 1996
Basic Earnings per Share:
Net Earnings $482,422 $357,484 $292,150
Weighted Average Shares Outstanding 352,104 348,554 335,199
Basic Earnings per Share $1.37 $1.03 $.87
Diluted Earnings per Share:
Net Earnings $482,422 $357,484 $292,150
Interest (After Taxes) on
Convertible Debt - - 3,620
Net Earnings, as Adjusted $482,422 $357,484 $295,770
Weighted Average Shares Outstanding 352,104 348,554 335,199
Dilutive Effect of Stock Options 1,691 205 158
Dilutive Effect of Convertible Debt - - 10,012
Weighted Average Shares, as Adjusted 353,795 348,759 345,369
Diluted Earnings per Share $1.36 $1.03 $.86
NOTE 8 - Shareholders' Equity:
Authorized shares of common stock were 1.4 billion at January 29, 1999 and
700 million at January 30, 1998 and January 31, 1997.
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 for $152.50. Each unit
is 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 commences a
tender offer for 15% or more of Lowe's common stock. The purchase rights are
not exercisable or transferable by the person or group acquiring the stock or
commencing the tender offer. The rights will expire on September 9, 2008,
unless the Company redeems or exchanges them earlier.
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 29, 1999, there were 285,050 and 6,869,614 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 at January 31, 1996 40 $19.38
Granted 2,430 $19.56
Canceled or Expired (20) $19.38
Outstanding at January 31, 1997 2,450 $19.56
Granted 1,494 $22.55
Canceled or Expired (20) $19.56
Exercised (4) $19.56
Outstanding at January 30, 1998 3,920 $20.70
Granted 1,736 $44.35
Canceled or Expired (249) $20.78
Exercised (621) $19.77
Outstanding at January 29, 1999 4,786 $29.40
Exercisable at January 29, 1999 1,620 $20.41
Of the 4,786,000 options outstanding at January 29, 1999, 3,054,000 options
had exercise prices per share ranging from $19.38 to $23.66 with a
weighted-average remaining term of 3.2 years. The remaining options
outstanding, totaling 1,732,000, had exercise prices per share ranging from
$34.78 to $45.00 with a weighted-average remaining term of 6.8 years. The
exercise prices per share of those options exercisable at January 29, 1999
range from $19.38 to $23.66.
Stock appreciation rights were denominated in units, which were comparable to
a share of common stock for purposes of determining the amount payable under
an award. An award entitled 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, generally three years. The final
value was the average closing price of a share of common stock during the last
month of the performance period. Limits were established with respect to the
amount payable on each unit. A total of 253,700 stock appreciation rights
were paid out at the maximum level of $1,902,750 during 1998 with no remaining
awards outstanding at January 29, 1999. The costs of these rights were
expensed over the performance periods and have reduced pre-tax earnings by
$0.3, $0.9 and $1.0 million in 1998, 1997 and 1996, respectively.
Restricted stock awards of 10,000, 870,700 and 777,100 shares, with per share
weighted-average fair values of $35.13, $24.80 and $16.57, were granted to
certain executives in 1998, 1997 and 1996, 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 1998, a total of 280,100
shares were forfeited and 164,950 shares became vested. At January 29, 1999,
grants totaling 1,548,750 shares are included in Shareholder's Equity and are
being amortized as earned over periods not exceeding seven years. Related
expense (charged to compensation expense) for 1998, 1997 and 1996 was $18.5,
$6.2 and $1.9 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 50,000 shares may be issued under this Plan. In 1998, 1997 and 1996,
12,000, 8,000 and 8,000 shares, respectively, were issued under this Plan.
Prior to its expiration in 1994, 280,000 stock options were granted under a
Non-Employee Directors' Stock Option Plan. In 1998 and 1997, 40,000 and
24,000 shares, respectively, were exercised under this Plan. There were no
exercises under the Plan in 1996. No shares were canceled under the Plan in
1998, 1997 or 1996. At January 29, 1999, 104,000 shares were exercisable. Of
the remaining outstanding options at January 29, 1999, the exercise price per
share ranges from $3.19 to $9.44 and their weighted-average remaining term is
2.6 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. Had compensation for 1998, 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 1998, 1997 and 1996 would approximate the following pro forma amounts
(in thousands, except per share data):
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the assumptions listed below.
1998 1997 1996_
Weighted average fair value per option $18.38 $9.30 $8.50
Assumptions used:
Weighted average expected volatility 31.6% 34.8% 38.3%
Weighted average expected dividend yield 0.35% 0.60% 0.66%
Weighted average risk-free interest rate 4.71% 6.04% 6.01%
Weighted average expected life, in years 6.9 5.0 5.0
During 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income (SFAS 130)." The Company reports
comprehensive income in its consolidated statement of shareholders' equity.
SFAS 130 requires the reporting of comprehensive income in addition to net
earnings from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that has not been historically recognized in the calculation of
net earnings.
For the three years ended January 29, 1999, unrealized holding gains
(losses) on available-for-sale securities is the only other comprehensive
income component for the Company. As required by SFAS 130 in the year of
adoption and forward, the following disclosures of unrealized net holding
gains are made for 1998.
Pre- Tax After
(In Thousands) Tax Expense Tax
Unrealized net holding gains
arising during the year $417 $177 $240
Less: Reclassification adjustment for
gains included in net earnings 17 6 11
Unrealized net gains on available-for-sale
securities, net of reclassification adjustment $400 $171 $229
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.
In August 1998, the Company entered into a $100 million operating lease
agreement for a distribution facility and store facilities. The initial lease
term is three years with two 1-year renewal options. The agreement contains
significant guaranteed residual values and purchase options at original cost
for all properties under the agreement.
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:
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. 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 1998, 1997 and 1996 was $80.3, $63.1 and
$61.1 million, respectively.
At January 29, 1999, the Employee Stock Ownership Trust held approximately
9.3% 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 1998, 1997 and 1996 were
$10.6, $8.7 and $7.2 million, respectively. The Company's common stock is an
investment option for participants in the ESIP. Shares held in the ESIP are
voted by the trustee as directed by an administrative committee of the ESIP.
NOTE 12 - 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 15 - Subsequent Events (Unaudited):
In February 1999, the Company issued $400 million principal of 6.5% Debentures
due March 15, 2029. The debentures were issued at an original price of
$986.47 per $1000 principal amount, which represented an original discount of
.478% and underwriters' discount of .875%. The debentures may not be redeemed
prior to maturity.
In March 1999, the Company issued 6,206,895 shares of common stock in a public
offering. The net proceeds from the stock offering were approximately $348.1
million. The shares were issued under a shelf registration statement filed
with the Securities and Exchange Commission in December 1997.
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