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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-7898
LOWE'S COMPANIES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0578072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605 CURTIS BRIDGE ROAD, WILKESBORO, N.C. 28697
(Address of principal executive offices)
(Zip Code)
(336) 658-4000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class ____ Outstanding at August 27, 1999
Common Stock, $.50 par value 382,137,544
16
TOTAL PAGES
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LOWE'S COMPANIES, INC.
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Page No.
PART I - Financial Information:
Consolidated Balance Sheets - July 30, 1999,
July 31, 1998 and January 29, 1999 3
Consolidated Statements of Current and
Retained Earnings - quarter and six months
ended July 30, 1999 and July 31, 1998 4
Consolidated Statements of Cash Flows - six
months ended July 30, 1999 and July 31, 1998 5
Notes to Consolidated Financial Statements. 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-12
Independent Accountants' Report 13
PART II - Other Information 14
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 (a) - Exhibits
Item 6 (b) - Reports on Form 8-K
EXHIBIT INDEX 16
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Lowe's Companies, Inc.
Consolidated Balance Sheets
In Thousands
July 30, July 31, January 29,
1999 1998 1999
Assets
Current assets:
Cash and cash equivalents $973,684 $603,330 $228,874
Short-term investments 51,366 43,680 20,343
Accounts receivable - net 181,651 159,613 143,928
Merchandise inventory 2,589,854 2,182,043 2,346,092
Deferred income taxes 56,245 43,566 56,124
Other assets 77,051 94,907 49,021
Total current assets 3,929,851 3,127,139 2,844,382
Property, less
accumulated depreciation 4,535,999 3,602,045 4,085,798
Long-term investments 33,202 36,775 28,716
Other assets 119,402 80,080 105,508
Total assets $8,618,454 $6,846,039 $7,064,404
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $92,475 $93,975 $117,075
Current maturities
of long-term debt 118,217 48,020 107,893
Accounts payable 1,472,209 1,287,855 1,220,543
Employee retirement plans 78,350 59,361 85,466
Accrued salaries and wages 119,972 87,944 123,545
Other current liabilities 464,610 369,801 269,734
Total current liabilities 2,345,833 1,946,956 1,924,256
Long-term debt, excluding
current maturities 1,747,142 1,495,495 1,364,278
Deferred income taxes 174,028 139,366 175,372
Other long-term liabilities 3,603 3,516 3,209
Total liabilities 4,270,606 3,585,333 3,467,115
Shareholders' equity
Preferred stock - $5 par value,
none issued - - -
Common stock - $.50 par value;
Issued and Outstanding
July 30, 1999 381,918
July 31, 1998 370,932
January 29, 1999 374,388 190,959 185,466 187,194
Capital in excess of par 1,731,544 1,209,739 1,325,817
Retained earnings 2,446,622 1,898,022 2,114,248
Unearned compensation-
restricted stock awards (21,204) (32,679) (30,387)
Accumulated other
comprehensive income (loss) (73) 158 417
Total shareholders' equity 4,347,848 3,260,706 3,597,289
Total liabilities and
shareholders' equity $8,618,454 $6,846,039 $7,064,404
See accompanying notes to consolidated financial statements.
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Lowe's Companies, Inc.
Consolidated Statements of Current and Retained Earnings
In Thousands, Except Per Share Data
Quarter Ended Six Months Ended
July 30, 1999 July 31, 1998 July 30, 1999 July 31, 1998
Current Earnings Amount Percent Amount Percent Amount Percent Amount Percent
Net sales $4,435,219 100.00 $3,733,642 100.00 $8,207,138 100.00 $6,883,421 100.00
Cost of sales 3,247,933 73.23 2,743,765 73.49 6,012,762 73.26 5,063,041 73.55
Gross margin 1,187,286 26.77 989,877 26.51 2,194,376 26.74 1,820,380 26.45
Expenses:
Selling, general
and administrative 704,821 15.89 602,055 16.13 1,369,172 16.68 1,171,610 17.02
Store opening costs 15,465 0.35 14,952 0.40 33,675 0.41 27,347 0.40
Depreciation 81,723 1.84 70,455 1.89 159,643 1.95 139,303 2.02
Interest 22,096 0.50 18,810 0.50 45,403 0.55 40,449 0.59
Nonrecurring merger costs - - - - 24,378 0.30 - -
Total expenses 824,105 18.58 706,272 18.92 1,632,271 19.89 1,378,709 20.03
Pre-tax earnings 363,181 8.19 283,605 7.59 562,105 6.85 441,671 6.42
Income tax provision 132,964 3.00 102,856 2.75 206,930 2.52 160,195 2.33
Net earnings $230,217 5.19 $180,749 4.84 $355,175 4.33 $281,476 4.09
Shares outstanding - Basic 381,635 370,612 380,220 370,125
Basic earnings per share $0.60 $0.49 $0.93 $0.76
Shares outstanding - Diluted 384,311 375,667 383,104 375,004
Diluted earnings per share $0.60 $0.48 $0.93 $0.76
Retained Earnings
Balance at beginning
of period $2,227,816 $1,727,783 $2,114,248 $1,636,666
Net earnings 230,217 180,749 355,175 281,476
Cash dividends (11,411) (10,510) (22,801) (20,120)
Balance at end
of period $2,446,622 $1,898,022 $2,446,622 $1,898,022
See accompanying notes to consolidated financial statements.
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Lowe's Companies, Inc.
Consolidated Statements of Cash Flows
In Thousands
For the Six Months Ended
July 30, July 31,
Periods Ended On 1999 1998
Cash Flows From Operating Activities:
Net Earnings $355,175 $281,476
Adjustments to Reconcile
Net Earnings to Net Cash Provided By
Operating Activities:
Depreciation 159,643 139,303
Amortization of Original Issue Discount 307 221
Decrease in Deferred Income Taxes (1,329) (6,494)
Loss on Disposition/Writedown
of Fixed and Other Assets 37,994 14,722
Changes in Operating Assets and Liabilities:
Accounts Receivable - Net (37,723) (41,205)
Merchandise Inventory (243,762) (264,618)
Other Operating Assets (25,759) (56,648)
Accounts Payable 251,666 251,973
Employee Retirement Plans 40,455 33,989
Other Operating Liabilities 200,241 146,895
Net Cash Provided by Operating Activities 736,908 499,614
Cash Flows from Investing Activities:
(Increase) Decrease in Investment Assets:
Short-Term Investments (29,926) (16,059)
Purchases of Long-Term Investments (7,713) (13,632)
Proceeds from Sale/Maturity
of Long-Term Investments 1,509 522
Increase in Other Long-Term Assets (32,733) (7,768)
Fixed Assets Acquired (617,395) (422,232)
Proceeds from the Sale of Fixed
and Other Long-Term Assets 21,377 12,188
Net Cash Used in Investing Activities (664,881) (446,981)
Cash Flows from Financing Activities:
Net Decrease in Short-Term Borrowings (24,600) (4,129)
Long-Term Debt Borrowings 394,587 328,160
Repayment of Long-Term Debt (36,951) (10,917)
Proceeds from Stock Offering 348,299 -
Proceeds from Stock Options Exercised 14,249 8,587
Cash Dividend Payments (22,801) (29,707)
Net Cash Provided by Financing Activities 672,783 291,994
Net Increase in Cash and Cash Equivalents 744,810 344,627
Cash and Cash Equivalents, Beginning of Period 228,874 258,703
Cash and Cash Equivalents, End of Period $973,684 $603,330
See accompanying notes to consolidated financial statements.
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Lowe's Companies, Inc.
Notes to Consolidated Financial Statements
Note 1: The accompanying Consolidated Financial Statements (unaudited) have
been reviewed by independent certified public accountants, and in
the opinion of management, they contain all adjustments necessary to
present fairly the financial position as of July 30, 1999, and the
results of operations for the quarters and six months ended July 30,
1999 and July 31, 1998, and the cash flows for the six months ended
July 30, 1999 and July 31, 1998.
These interim financial statements should be read in conjunction
with the financial statements and notes thereto included in the
Lowe's Companies, Inc. (the Company) Annual Report on Form 10-K for
the fiscal year ended January 29, 1999. The financial results for
the interim periods may not be indicative of the financial results
for the entire fiscal year.
Note 2: The Company completed its merger with Eagle Hardware & Garden, Inc.
(Eagle) on April 2, 1999. The transaction, which is valued at
approximately $1.3 billion, was structured as a tax-free exchange of
the Company's common stock for Eagle's common stock, and was
accounted for as a pooling of interests. The financial statements
and notes presented provide information on a combined basis for the
quarters and six months periods ended July 30, 1999, July 31, 1998
and as of January 29, 1999.
Note 3: Diluted earnings per share are calculated on the weighted average
shares of common stock as adjusted for the dilutive effect of stock
options at the balance sheet date. The weighted average number of
shares, as adjusted for dilution, were 384,311,000 and 375,667,000
for the quarters ended July 30, 1999 and July 31, 1998,
respectively,and 383,104,000 and 375,004,000 for the six months
ended July 30, 1999 and July 31, 1998, respectively.
Note 4: Net interest expense is composed of the following (in thousands):
Quarter ended Six months ended
July 30, July 31, July 30, July 31,
1999 1998 1999 1998
Long-term debt $ 23,930 $ 19,364 $ 46,465 $ 37,850
Capitalized leases 10,825 9,736 21,163 19,759
Short-term debt 1,208 1,387 3,076 2,816
Amortization of loan cost 259 189 495 394
Short-term interest income (9,821) (7,903) (17,775) (13,687)
Interest capitalized on
construction in progress (4,305) (3,963) (8,021) (6,683)
Net interest expense $ 22,096 $ 18,810 $ 45,403 $ 40,449
Note 5: Inventory is stated at the lower of cost or market using the last-
in, first-out inventory accounting method, except for the inventory
held by Eagle. Inventory held by Eagle of $271.0 and $213.8 million
at July 30, 1999 and July 31, 1998, respectively, is stated at the
lower of cost or market using the weighted average method of
inventory accounting. The Company's LIFO reserve was $38.6 million
at July 30, 1999 and January 29, 1999 and $64.6 million at July 31,
1998.
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Note 6: Property is shown net of accumulated depreciation of $1.1 billion at
July 30, 1999, $.9 billion at July 31, 1998 and $1.0 billion at
January 29, 1999.
Note 7: Supplemental disclosures of cash flow information (in thousands):
Six months ended
July 30, 1999 July 31, 1998
Cash paid for interest $ 60,448 $ 50,898
(net of capitalized)
Cash paid for income taxes 150,552 128,266
Non-cash investing and
financing activities:
Common stock issued to ESOP 47,571 44,597
Fixed assets acquired under
capital lease 35,243 12,597
Note 8: In January 1999, the Board of Directors authorized the funding of
the Fiscal 1998 ESOP contribution primarily with the issuance of new
shares of the Company's common stock. During the first half of
Fiscal 1999, the Company issued 823,190 shares, with a market value
of $47.6 million.
Note 9: In February 1999, the Company issued $400 million of 6.5% Debentures
due March 15, 2029 in a private offering. The debentures were
registered in July 1999 with the filing of Form S-4 with the
Securities and Exchange Commission. The debentures were issued at
an original price of $986.47 per $1,000 principal amount, net of the
original issue discount and underwriters' discount. 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 offering were $348.3 million and were issued
under a shelf registration statement filed with the Securities and
Exchange Commission in December 1997.
Note 10: Total comprehensive income, comprised of net earnings and unrealized
holding gains (losses) on available-for-sale securities, was $229.9
and $180.9 million for the quarters ended July 30, 1999 and July 31,
1998, respectively, compared to reported net earnings of $230.2 and
$180.7 million for the second quarter of 1999 and 1998. Total
comprehensive income was $354.7 and $281.4 million for the six
months ended July 30, 1999 and July 31, 1998, respectively, compared
to reported net earnings of $355.2 and $281.5 million for the first
six months of 1999 and 1998.
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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
quarter and six months ended July 30, 1999. This discussion should be read in
conjunction with the financial statements, and financial statement footnotes
included in the Company's most recent Form 10-K.
The Company completed its merger with Eagle Hardware & Garden, Inc. (Eagle)
on April 2, 1999. The transaction, which is valued at approximately $1.3
billion, was structured as a tax-free exchange of the Company's common stock
for Eagle's common stock, and was accounted for as a pooling of interests. As
a result, all current and historical financial information is presented on a
combined basis.
OPERATIONS
For the second quarter of fiscal 1999, sales increased 19% to $4.4 billion,
comparable store sales increased 5.6% and net earnings rose 27% to $230.2
million compared to last year's second quarter results. Diluted earnings per
share were $.60 compared to $.48 for the comparable quarter of last year. For
the six months ended July 30, 1999, sales increased 19% to $8.2 billion,
comparable store sales increased 6.1% and net earnings increased 26% to $355.2
million compared to the first six months of 1998. Diluted earnings per share
were $.93 compared to $.76 for the first six months of last year. Pretax
earnings for the first six months of 1999 were reduced by a nonrecurring
charge of $24.4 million relating to the Company's merger with Eagle.
Excluding the one-time charge, diluted earnings per share would have been $.97
for the first six months of 1999.
The sales increase in the second quarter was attributable to 8.1 million
square feet of retail selling space relating to new and relocated stores since
last year's second quarter and the 5.6% comparable store sales gain. Sales in
the Company's core businesses performed well during the second quarter. The
Company experienced its strongest sales increases in appliances, kitchen
cabinets, nursery and garden products, hardware and home decor categories.
Gross margin was 26.77% of sales for the quarter ended July 30, 1999
compared to 26.51% for last year's comparable quarter. Gross margin for the
six months ended July 30, 1999 was 26.74% versus 26.45% in the first six
months of 1998. The increase in margin rate for the second quarter and first
six months of 1999 results primarily from favorable changes in product mix,
ongoing store pricing disciplines, leveraging of distribution facilities and
lower product costs. There was a LIFO credit of $3.0 million for the first
six months of 1998 compared to no LIFO charge or credit in the first six
months of 1999.
Selling, general and administrative expenses (SG&A) were 15.89% of sales
versus 16.13% in last year's second quarter. SG&A increased by 17% compared
to the 19% increase in sales for the quarter. SG&A was 16.68% of sales for the
six months ended July 30, 1999 compared to 17.02% for the first six months of
1998. SG&A increased by 17% compared to the 19% increase in sales for the
first six
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months of 1999. Lower net advertising expense, increased credit card program
income and controls relating to other expenses contributed to the positive
leverage in SG&A for the second quarter and the first six months of 1999.
Store opening costs were $15.5 million for the quarter ended July 30, 1999
compared to $15.0 million last year, representing costs associated with the
opening of 21 stores during the current year's second quarter (8 new and 13
relocated). This compares to 15 stores for the comparable period last year (8
new and 7 relocated). Charges in this quarter for future and prior openings
were $4.3 million compared to $5.4 million in last year's second quarter.
Charges totaling $2.4 and $3.6 million related to stores opening in the second
quarter of 1999 and 1998, respectively, were expensed prior to the respective
quarter. Store opening costs for the six months ended July 30 ,1999 were
$33.7 million compared to $27.3 million last year. These costs were
associated with the opening of 34 stores during the first six months of 1999
(16 new and 18 relocated) compared to 25 stores (15 new and 10 relocated)
opened during the first six months of last year. For the six months ended,
store opening costs also included a $2.2 million charge relating to Eagle's
adoption of the American Institute of Certified Public Accountants' Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities". These
expenses were previously capitalized and written off after stores were opened.
Currently, these costs are expensed as incurred. The Company's 1999 expansion
plans are discussed under "Liquidity and Capital Resources" below.
Depreciation was $81.7 million for the quarter ended July 30, 1999 and
$159.6 million for the six months then ended. This represents an increase of
16.0% and 14.6% over the respective comparable periods last year. The
increase is due primarily to additions of buildings, fixtures, displays and
computer equipment relating to the Company's expansion program.
Interest expense increased from $18.8 and $40.4 million to $22.1 and $45.4
million for the quarter and six months ended July 30, 1999, respectively.
Interest has increased primarily due to interest expense on debentures issued
since last year's second quarter.
In the first quarter of 1999, the Company recorded nonrecurring costs of
$24.4 million relating to the merger with Eagle which consisted of $15.7
million relating to the writeoff of nonusable Eagle properties, $1.5 million
for severance obligations to former Eagle executives and $7.2 million in
direct merger costs such as accounting, legal, investment banker and other
miscellaneous fees.
The Company's effective income tax rate was 36.61% for the quarter ended
July 30, 1999 and 36.27% for last year's second quarter. The effective rate
was 36.81% compared to 36.27% for the six months ended July 30, 1999 and July
31, 1998, respectively. The higher rate in 1999 is primarily related to the
expansion into states with higher income tax rates and the impact of non-
deductible merger expenses.
LIQUIDITY AND CAPITAL RESOURCES
Primary sources of liquidity are cash flows from operating activities and
certain financing activities. Net cash provided by operating activities was
$737 million for the six months ended July 30, 1999 compared to $500 million
for the first six months of 1998. The $237 million increase in the current
year resulted primarily from increased cash earnings, an increase in other
liabilities due to payment
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timing differences and a smaller increase in merchandise inventory as compared
to the prior period. The Company's working capital was $1.6 billion at July
30, 1999 compared to $1.2 billion at July 31, 1998 and $920 million at January
29, 1999.
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 $617 million and $422 million for the six
months ended July 30, 1999 and July 31, 1998, respectively. At July 30, 1999,
the Company had 533 stores in 37 states and 50.6 million square feet of retail
selling space, a 19% increase over the selling space as of July 31, 1998.
Cash flows provided by financing activities were $673 million for the six
months ended July 30, 1999 compared to $292 million for the six months ended
July 31, 1998. The major cash components of financing activities in the first
six months of 1999 included the issuance of $400 million principal of 6.5%
debentures and $348.3 million in net proceeds from a common stock offering.
Property has increased as a result of the Company's plan to continue
expansion of retail sales floor square footage by expanding into new markets
and relocating from older, smaller stores to larger stores. The Company's
1999 capital budget is approximately $1.7 billion, inclusive of approximately
$214 million in operating or capital leases. More than 80% of this planned
commitment is for store expansion. Expansion plans for 1999 consist of
approximately 85 to 90 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. Expansion in the first six
months of fiscal 1999 included 16 new stores and 18 relocations representing
3.1 million square feet of new incremental retail space.
The Company believes that funds from operations, debt issuances, leases and
existing credit agreements will be adequate to finance the 1999 expansion plan
and other operating needs.
As discussed in the annual report for the year ending January 29, 1999, 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. The risks
associated with long-term investments at July 30, 1999 have not changed
materially since January 29, 1999. Long-term debt has increased primarily due
to the issuance of $400 million principal amount of 6.5% Debentures due March
15, 2029.
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.
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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 the first quarter. Currently, over 99% of the
programs have been remediated. In addition, approximately $19 million of
computer hardware has been purchased to replace non-compliant computer
hardware. 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. The
Company's conversion of internally developed legacy systems was completed by
the end of fiscal 1998. The first stage of certification testing was completed
by September, 1999 with stage two planned to be completed in mid December,
1999.
With respect to 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.
The assessment phase was completed in April 1999. Based on those assessments,
contingency plans for high priority and critical business functions have been
developed and have been reviewed by the Company's senior management. The
contingency plans approved by senior management will be implemented and
revised during the remainder of calendar year 1999. 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. Over half of
the Company's stores have generators in place that would mitigate most
problems associated with a temporary power outage, while the remaining stores
have the capability to continue operations on a curtailed basis until power is
restored.
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, 44% of the recipients have currently responded. A majority of the
non-respondents have been contacted by phone and our questionnaire has been
faxed to them requesting signed returns within 24 hours. The Company is
currently assessing the adequacy of these responses. 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 has developed
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 in the third quarter of 1999. For the remainder of the project, the
Company's efforts will be devoted to four primary areas:
(1) certification testing of IT systems to ensure Year 2000 compliance,
(2) contingency plan implementation and revisions for business areas as well
as IT systems,
(3) continued follow-up to questionnaires sent to third parties, and
(4) 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
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complete the project by the planned completion time of the third quarter of
1999. Since the use of these additional resources is considered unlikely, no
estimates as to their costs have been made at this time.
Following completion of the merger on April 2, 1999, the Company began a
review of the Eagle Hardware and Garden subsidiary preparedness for the Year
2000. The findings indicated that the Eagle computer systems are
substantially Year 2000 ready. For the Eagle operations, the remainder of
this year will be focused on developing contingency plans and upgrading point-
of-sale software.
The Company believes that its contingency plan should mitigate any adverse
effect on its business from the Year 2000 problem. However, if:
(1) the implementation of the plan is not completed on time,
(2) the Company has failed to identify and fix material non-complying
equipment or software, or
(3) 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, the Company believes that its most likely worst case scenarios
would involve the inability of the Company's IT and non-IT systems to process
transactions in the stores or on a regional or company-wide basis. If that
were to occur, 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 26,
2001. 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.
FORWARD-LOOKING STATEMENTS
This Securities and Exchange Commission Form 10-Q may include "forward-
looking statements" within the meaning of Section 27A of the Securities Act
and Section 21E of the Exchange Act. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct.
Important factors that could cause actual results to differ from expectations
include, but are not limited to, general economic trends, availability and
development of real estate for expansion, commodity markets, the nature of
competition, vendor supply, and weather conditions, all which are described in
detail in the Company's 1998 Annual Report.
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INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Lowe's Companies, Inc.:
We have reviewed the accompanying consolidated balance sheet of Lowe's
Companies, Inc. and subsidiary companies (the "Company") as of July 30, 1999,
and the related consolidated statements of current and retained earnings, and
cash flows for the three-month periods ended July 30, 1999 and July 31, 1998.
These financial statements are the responsibility of the Company's management.
The accompanying consolidated financial statements give retroactive effect to
the 1999 merger of the Company and Eagle Hardware & Garden, Inc. which has
been accounted for as a pooling of interests as described in note 2 to the
consolidated financial statements. We were furnished with the reports of
other accountants on their review of the interim financial information of
Eagle Hardware and Garden, Inc., whose total revenues constituted 8% of
consolidated total revenues for both the three-month and six-month periods
ended July 31, 1998.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Lowe's Companies, Inc. and
subsidiary companies as of January 29, 1999, prior to restatement for the 1999
pooling of interests (not presented herein); and in our report dated February
19, 1999, we expressed an unqualified opinion on those consolidated financial
statements. The financial statements of Eagle Hardware & Garden, Inc. for the
year ended January 29, 1999, were audited by other auditors whose report,
dated March 10, 1999, expressed an unqualified opinion on those financial
statements (not presented herein). We also audited the adjustments described
in Note 2 to the consolidated statements that were applied to restate the
January 29, 1999 consolidated balance sheet of the Company (not presented
herein). In our opinion, such statements are appropriate and have been
properly applied and the information set forth in the accompanying
consolidated balance sheet as of January 29, 1999 is fairly stated, in all
material respects, in relation to the restated consolidated balance sheet from
which it has been derived.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
August 11, 1999
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Part II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders.
(a) - The annual meeting of shareholders was held May 28, 1999.
(b) - Directors elected at the meeting: James F. Halpin, Richard K.
Lochridge, and Claudine B. Malone
Incumbent Directors whose terms expire in subsequent years are: Carol
A. Farmer, Robert L. Strickland, Peter C. Browning, Leonard L. Berry,
Paul Fulton, Robert G Schwartz and Robert L. Tillman
(c) - The matters voted upon at the meeting and the results of the voting
were as follows:
(1) Election of Directors: FOR WITHHELD
James F. Halpin 285,735,042 35,841,835
Richard K. Lochridge 285,757,119 35,819,758
Claudine B. Malone 285,693,327 35,883,550
(2) Proposal to approve the Lowe's Companies, Inc. Directors' Stock
Option Plan
FOR AGAINST ABSTAIN
266,432,259 53,525,960 1,598,756
Item 6 (a) - Exhibits
(3.2) Bylaws, as Amended and Restated May 28, 1999
Refer to the Exhibit Index on page 16
Item 6 (b) - Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended July
30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOWE'S COMPANIES, INC.
September 8, 1999 /s/ Kenneth W. Black, Jr.
Date ------------------ ----------------------------------------
Kenneth W. Black, Jr.
Vice President and Corporate Controller
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EXHIBIT INDEX
Page No.
Exhibit 3.2 - Bylaws, as Amended and Restated May 28, 1999 17 - 33