-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QBOhJPuysmtXkwhu9cBY/owdHUJgmE5r6Tn7RX1L0MUmAcLgrfQaw2juXeTsizfi nJMJ5X5eJSo7Kx3TSYEoBA== 0000060667-02-000003.txt : 20020426 0000060667-02-000003.hdr.sgml : 20020426 ACCESSION NUMBER: 0000060667-02-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020201 FILED AS OF DATE: 20020426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOWES COMPANIES INC CENTRAL INDEX KEY: 0000060667 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-LUMBER & OTHER BUILDING MATERIALS DEALERS [5211] IRS NUMBER: 560578072 STATE OF INCORPORATION: NC FISCAL YEAR END: 0129 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07898 FILM NUMBER: 02622917 BUSINESS ADDRESS: STREET 1: 1605 CURTIS BRIDGE RD CITY: WILKESBORO STATE: NC ZIP: 28697 BUSINESS PHONE: 3366584000 MAIL ADDRESS: STREET 1: 1605 CURTIS BRIDGE ROAD CITY: WILKERSBORO STATE: NC ZIP: 28697 10-K 1 form10k2001e.txt LOWE'S COMPANIES, INC. FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 1, 2002 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) Registrant's telephone number, including area code: (336) 658-4000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered Common Stock $.50 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x , No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant at April 1, 2002, based on a closing price of $43.23 per share, was $30,069,758,953. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class: COMMON STOCK, $.50 PAR VALUE, Outstanding at April 1, 2002: 776,775,934 shares. Documents Incorporated by Reference Annual Report to Security Holders for fiscal year ended February 1, 2002: Parts I and II. With the exception of specifically referenced information, the Annual Report to Security Holders for the fiscal year ended February 1, 2002 is not to be deemed filed as part of this report. Proxy Statement for the 2001 Annual Meeting which will be filed within 120 days after February 1, 2002: Part III. Part I Item 1 - Business General Lowe's Companies, Inc. (the Company or Lowe's) is the second largest retailer of home improvement products in the world, with a specific emphasis on retail do-it-yourself (DIY) and commercial business customers. Lowe's specializes in offering products and services for home improvement, home decor, home maintenance, home repair and remodeling, and maintenance of commercial buildings. As of February 1, 2002, Lowe's operated 744 stores in 42 states, with approximately 80.7 million square feet of retail selling space. Lowe's was incorporated in North Carolina in 1952 and has been a publicly held company since 1961. Lowe's common stock is listed on the New York Stock Exchange, with shares trading under the ticker symbol "LOW." Lowe's general offices are located in Wilkesboro, North Carolina. Lowe's has one reportable industry segment - the operation of home improvement retail stores. See Item 6 "Selected Financial Data" for the historical data of revenues, profits and identifiable assets of the Company. Store Expansion Lowe's is continuing to maintain an aggressive growth strategy. Lowe's current prototype store has a 121,000 square foot sales floor with an attached lawn and garden center comprising approximately 30,000 additional square feet. Lowe's 2002 expansion plan calls for opening approximately 123 stores (including the relocation of approximately 8 smaller format stores). The Company is focusing much of its future expansion on metro markets with populations of 500,000 or more. Stores in these larger markets made up approximately 65% of the total expansion in 2001 and will comprise a similar percentage of growth in 2002. The following table illustrates the growth of the Company over the last three years. 2001 2000 1999 Number of stores, beginning of year 650 576 520 New stores opened 101 80 60 Relocated stores opened 14 20 31 Stores closed (including relocated stores) (21) (26) (35) Number of stores, end of year 744 650 576 Customer Service Lowe's serves both retail and commercial business customers. Retail customers are primarily do-it-yourself homeowners and others buying for personal and family use. Commercial business customers include repair and remodeling contractors, electricians, landscapers, painters, plumbers and commercial and residential building maintenance professionals. Each Lowe's store caters to these customers by combining the merchandise, sales and service of: a home fashions and interior design center; a lawn and garden center; an appliance dealer; a hard goods discounter; a hardware store; an air conditioning, heating, plumbing and electrical supply center; and a building materials supplier. Lowe's offers two proprietary credit cards - one for individual retail customers and the other for commercial business customers. Lowe's commercial business customers can also make purchases on credit by using Lowe's in-house accounts. In addition, Lowe's accepts Visa, MasterCard, Discover and American Express credit cards. Products A typical Lowe's home improvement warehouse stocks more than 40,000 items, with hundreds of thousands of items available through our special order system. Each store carries a wide selection of nationally advertised brand name merchandise. The Company's merchandise selection supplies both the DIY retail and commercial business customer with items needed to complete home improvement, repair, maintenance or construction projects. See Note 15 on page 38 of the Annual Report to Security Holders for fiscal year ended February 1, 2002 for the table illustrating sales by product category for each of the last three fiscal years. Excluding special order vendors, the Company sources its products from approximately 7,000 merchandise vendors worldwide, with no single vendor accounting for more than 4% of total purchases. The Company is not dependent upon any single vendor. To the extent possible, the Company utilizes its Global Sourcing Division to purchase directly from foreign manufacturers and avoid third party importers. Management believes that alternative and competitive suppliers are available for virtually all its products, further increasing opportunities for product quality and operating margins. Lowe's has begun to cultivate and execute vendor alliance partnerships with key vendor partners in an effort to enhance our market share where such partnerships are advantageous to the customer, Lowe's and the vendors. In order to maintain appropriate inventory levels in stores and to improve distribution efficiencies, the Company operates seven highly automated regional distribution centers (RDC's). The current RDC's are strategically located in North Carolina, Georgia, Indiana, Pennsylvania, Texas, California and Ohio. Each Lowe's store is served by one of these RDC's. The Company also operates nine smaller support facilities in order to distribute merchandise that requires special handling due to size or type of packaging, such as lumber, various imports and building materials. Approximately 50% of the merchandise purchased by the Company is shipped through its distribution facilities, while the remaining portion is shipped directly to stores from vendors. Regional distribution centers are currently under construction in Cheyenne, Wyoming, and in Northampton County, North Carolina. Marketing The Company reaches target customers through a mixture of television, radio, direct mail, newspaper, event sponsorships, and in-store programs. Each marketing initiative is based on understanding current and prospective customers. The Company has a strategic alliance with the HGTV network that allows it to utilize a substantial portion of the commercial airtime in which only the Company's and its vendors' commercials are aired. This is one of a half dozen media partnership programs which the Company employs in an effort to build the image and equity of the Lowe's brand, while complementing the core media and marketing programs. Additionally, the Company hosts customer hospitality events through its Team 48 NASCAR sponsorship, supports the wide- ranging activities of Lowe's Home Safety Council, and utilizes its proprietary credit programs to drive customer traffic and purchases. In 2001, the Company continued to introduce or redefine programs to respond to the changing needs and lifestyles of targeted customers. Primary to this effort is the Company's initiative to serve commercial business customers. The Company has responded to the special needs of this customer group by carrying more professional brands, increasing in-stock quantities for bigger jobs and testing various marketing approaches in an effort to win the loyalty of commercial customers. The Company continues to emphasize installed sales and currently has thirty product categories available where customers can have installation arranged through Lowe's stores. In addition, kiosks are available in departments such as appliances, home decor/flooring, electrical/lighting, millwork, hardware, seasonal, plumbing and tools for our customer's special product ordering. Some of these kiosks are technology based and some are literature based, but all facilitate the ability of the customer to special order to fit their home improvement needs. Competition The home improvement retailing business is highly competitive. The principal competitive factors are price, location, customer service, product and brand selection, and name recognition. The Company competes with a number of traditional hardware, plumbing, electrical and home supply retailers, as well as other chains of warehouse home improvement stores and lumber yards in most of its market areas. In addition, the Company competes, with respect to some of its products, with discount stores, mail order firms, and warehouse clubs. Lowe's is the second largest retailer of home improvement products in the world. Due to the large number and variety of competitors, management is unable to precisely measure the Company's market share in its existing market areas. However, Lowe's defines the market segments that it serves as DIY, appliances, lawn & garden, home decor, repair/remodeling, specialty trade contractor, and property management. This total market is estimated to be $400 billion of which Lowe's share is estimated to be approximately 6% as of February 1, 2002. Information Systems The Company is continuously assessing and upgrading its information systems in an effort to support growth, to control costs, and to enable better decision-making. During the last six years, the Company has made a substantial investment in developing and purchasing new computer systems. Lowe's has a point of sale system, electronic bar code scanning system, various design systems and dual UNIX Servers in each of its stores. Store information is communicated to the support center's central computer via a terrestrial based (frame relay) network with back up being provided by a satellite based wide area network. These systems provide customer checkout with automated credit card approval and also provide store-based perpetual inventory information. In addition, the systems also provide labor planning and item movement experience. These computers supply the general office functions with the information needed to support the stores, including centralized inventory replenishment. Employees As of February 1, 2002, the Company employed approximately 87,000 full- time and 21,000 part-time employees, none of which are covered by any collective bargaining agreements. Management considers its relations with its employees to be good. Item 2 - Properties At February 1, 2002, the Company operated 744 stores with a total of 80.7 million square feet of selling space. The current prototype large store is a 121,000 square foot sales floor with a lawn and garden center comprising approximately 30,000 additional square feet. Of the total stores operating at February 1, 2002, approximately 70% of the facilities are owned, with the remainder being leased. Approximately 45% of these leases are capital leases. The Company also owns and operates seven regional distribution centers and nine smaller support facilities, four of which are reload centers for lumber and building commodities. The Company's general offices are located in Wilkesboro, North Carolina and occupy several buildings, the majority of which are owned. Item 3 - Legal Proceedings 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. Item 4 - Submission of Matters to a Vote of Security Holders Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to General Instruction G(3) of Form 10-K, the following list is included as an unnumbered item in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Stockholders to be held on May 31, 2002. The following is a list of names and ages of all of the executive officers of the registrant indicating all positions and offices with the registrant held by each such person and each person's principal occupations or employment during the past five years. Name Age Title Robert L. Tillman 58 Chairman of the Board since 1998 and Chief Executive Officer since 1996. Theresa A. Anderson 44 Senior Vice President, Merchandising Sales and Service since 2001; Senior Vice President, Operations & Merchandising Support, 2000 - 2001; Vice President, Store Support, 1999 - 2000; Vice President, Merchandising, 1998 - 1999; Divisional Merchandising Manager, 1996 - 1998. Kenneth W. Black, Jr. 42 Senior Vice President and Chief Accounting Officer since 1999; Vice President and Corporate Controller, 1997 - 1999; Controller, 1996 - 1997. Gregory M. Bridgeford 47 Senior Vice President, Business Development since 1999; Senior Vice President, Marketing, 1998 - 1999; Senior Vice President and General Merchandise Manager, 1996 - 1998. Michael K. Brown 38 Senior Vice President, Store Operations - Western Division since 2001; Vice President, Specialty Sales, 1999 - 2001; Regional Vice President, Northeast Division, 1998 - 1999; Merchandising Vice President, Lawn and Garden, Bag Goods/Chemicals and Outdoor Power Equipment, 1996 - 1998. Charles W. Canter, Jr. 51 Senior Vice President, Store Operations - Northern Division since 1999; Senior Vice President and General Merchandise Manager, Building Materials, 1998 - 1999; Vice President, Merchandising - Millwork, 1998; Regional Vice President, Store Operations, 1993 - 1998. Robert J. Gfeller, Jr. 40 Senior Vice President, Marketing and Advertising since 2000; Vice President, Marketing, 1999 - 2000; Coca-Cola USA Corp., 1996 - 1999; Nabisco Co.-Planters Co. Division, 1994 - 1996. Stephen A. Hellrung 54 Senior Vice President, General Counsel and Secretary since 1999; The Pillsbury Company, 1997 - 1998; Bausch & Lomb, Incorporated, 1982 - 1997. A. Lee Herring 48 Senior Vice President, Distribution since 2001; Senior Vice President, Logistics, 1996 - 2001. Perry G. Jennings 44 Senior Vice President, Human Resources since 1999, Vice President, Operations and Merchandising Support, 1998; Director, Merchandising Support and Administration, 1996 - 1997. John L. Kasberger 56 Senior Vice President and General Merchandising Manager, Hardlines since 2001; Vice President, Merchandising - Appliances/Kitchens, 2000; Vice President, Internet Merchandising, 1999; Vice President, Merchandising - Appliances, 1998 - 1999; Divisional Merchandise Manager, 1992 - 1998. John R. Manna 44 Vice President and Corporate Controller since 2000, Assistant Controller, 1999 - 2000; Director of Corporate Accounting 1996 - 1999. Michael K. Menser 48 Senior Vice President and General Merchandising Manager, Home Decor since 1998; Vice President, Logistics, 1996 - 1998. Robert A. Niblock 39 Executive Vice President since 2001, and Chief Financial Officer since 2000; Senior Vice President, Finance, 1999 - 2000; Vice President and Treasurer, 1997 - 1998; Senior Director, Taxation, 1996 - 1997. Dale C. Pond 56 Executive Vice President, Merchandising since 2001; Executive Vice President, Chief Merchandising Officer, 2000 - 2001; Executive Vice President, Merchandising and Marketing, 1998 - 2000; Senior Vice President, Marketing, 1993 - 1998. David E. Shelton 55 Senior Vice President, Real Estate/Engineering and Construction since 1997; Vice President, Store Operations, 1995 - 1997. John David Steed 50 Senior Vice President and General Merchandising Manager, Building Products since 2001; Vice President, Merchandising - Western Division, 1999 - 2001; Vice President, Merchandising - Fashion Plumbing/Electrical, 1998 - 1999; Divisional Merchandise Manager - Electrical, 1995 - 1997. Larry D. Stone 50 Executive Vice President, Store Operations since 2001; Executive Vice President and Chief Operating Officer, 1997 - 2001; Executive Vice President, Store Operations, 1996 - 1997. William C. Warden, Jr. 49 Executive Vice President, Administration since 2001; Executive Vice President and Chief Administrative Officer, 1999 - 2001; Executive Vice President, General Counsel, Chief Administrative Officer and Secretary, 1996 - 1999. Gregory J. Wessling 50 Senior Vice President, Store Operations - Southern Division since 1999; Senior Vice President, Store Operations - Eastern Division, 1998 - 1999; Senior Vice President and General Merchandise Manager, 1996 - 1998. Thomas E. Whiddon 49 Executive Vice President, Logistics and Technology since 2000; Executive Vice President and Chief Financial Officer, 1996 - 2000. Part II Item 5 - Market for the Registrant's Common Stock and Related Security Holder Matters Lowe's common stock is traded on the New York Stock Exchange, Inc. (NYSE). The ticker symbol for Lowe's is LOW. As of February 1, 2002, there were 19,277 holders of record of Lowe's common stock. The table, "Lowe's Quarterly Stock Price Range and Cash Dividend Payment", on page 40 of the Annual Report to Security Holders for fiscal year ended February 1, 2002 sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported by the NYSE Composite Tape, and the dividends per share declared on the common stock during such periods. Item 6 - Selected Financial Data See page 41 of the Annual Report to Security Holders for the fiscal year ended February 1, 2002. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations See "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 20 through 24 and "Disclosure Regarding Forward-Looking Statements" on page 19 of the Annual Report to Security Holders for the fiscal year ended February 1, 2002. Item 7a - Quantitative and Qualitative Disclosures about Market Risk See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk" beginning on page 20 of the Annual Report to Security Holders for the fiscal year ended February 1, 2002. Item 8 - Financial Statements and Supplementary Data See the "Independent Auditors' Report" of Deloitte & Touche LLP on page 18 and the financial statements and notes thereto on pages 25 through 38, and the "Selected Quarterly Data" on page 41 of the Annual Report to Security Holders for the fiscal year ended February 1, 2002. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 10 - Directors and Executive Officers of the Registrant See "Election of Directors", "Information Concerning the Nominees," and "Information Concerning Continuing Directors" included in the definitive Proxy Statement which will be filed pursuant to regulation 14A, with the SEC within 120 days after the fiscal year ended February 1, 2002. Item 11 - Executive Compensation See "Compensation of Executive Officers", "Option/SAR Grants in Last Fiscal Year", "Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-end Option/SAR Values", and "Long-term Incentive Plans - Awards in Last Fiscal Year" included in the definitive Proxy Statement which will be filed pursuant to regulation 14A, with the SEC within 120 days after the fiscal year ended February 1, 2002. Information included under the captions "Report of the Compensation and Organization Committee" and "Performance Graph" is not incorporated by reference herein. Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters See "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" included in the definitive Proxy Statement, which will be filed pursuant to regulation 14A, with the SEC within 120 days after the fiscal year ended February 1, 2002. Item 13 - Certain Relationships and Related Transactions See "Information about the Board of Directors and Committees of the Board" included in the definitive Proxy Statement which will be filed pursuant to regulation 14A, with the SEC within 120 days after the fiscal year ended February 1, 2002. Part IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K a) 1. Financial Statements See the following items and page numbers appearing in the Annual Report to Security Holders for the fiscal year ended February 1, 2002: Page(s) Independent Auditors' Report 18 Consolidated Statements of Earnings for each of the three fiscal years in the period ended February 1, 2002 25 Consolidated Balance Sheets at February 1, 2002 and February 2, 2001 26 Consolidated Statements of Shareholders' Equity for each of the three fiscal years in the period ended February 1, 2002 27 Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended February 1, 2002 28 Notes to Consolidated Financial Statements for each of the three fiscal years in the period ended February 1, 2002 29-38 2. Financial Statement Schedules Schedules are omitted because of the absence of conditions under which they are required or because information required is included in financial statements or the notes thereto. 3. Exhibits (3.1) Restated and Amended Charter (filed as Exhibit 3.1 to the Company's Form 10-Q dated September 14, 2001 and incorporated by reference herein). (3.2) Bylaws, as amended (filed as Exhibit 3.2 to the Company's Form 10- K dated April 13, 2001 and amended on July 12, 2001 and incorporated by reference herein). (4.1) Amended and Restated Rights Agreement, dated December 2, 1999 between the Company and Equiserve Trust Company, N.A., as Rights Agent (incorporated herein by reference to Exhibit 2 of Amendment No. 2 to the Company's Registration Statement on Form 8-A dated on February 14, 2000, as amended by Exhibit 1 of Amendment No. 3 to the Company's Registration Statement on Form 8-A, dated March 2, 2000). (10.1) Lowe's Companies, Inc., 1989 Non-Employee Directors' Stock Option Plan (filed as Exhibit A to the Company's Proxy Statement dated June 9, 1989 and incorporated by reference herein). (10.2) Lowe's Companies, Inc., 1990 Benefit Restoration Plan (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended January 31, 1991, and incorporated by reference herein). (10.3) Lowe's Companies, Inc., Directors' Deferred Compensation Plan, effective July 1, 1994 (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein). (10.4) Lowe's Companies, Inc. Director's Stock Incentive Plan (filed on the Company's Form S-8 dated July 8, 1994 (No. 33-54497) and incorporated by reference herein). (10.5) Lowe's Companies, Inc. 1994 Incentive Plan (filed on the Company's Form S-8 dated July 8, 1994 (No. 33-54499) and incorporated by reference herein). (10.6) Amendments to the Lowe's Companies, Inc. 1994 Incentive Plan dated December 9, 1994 (filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein). (10.7) Amendments to the Lowe's Companies, Inc. 1994 Incentive Plan dated September 17, 1998 (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein). (10.8) Amendments to the Lowe's Companies, Inc. 1994 Incentive Plan dated December 4, 1998 (filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein). (10.9) Lowe's Companies, Inc. 1997 Incentive Plan (filed on the Company's Form S-8 dated August 29, 1997 (No. 333-34631) and incorporated by reference herein). (10.10) Amendments to the Lowe's Companies, Inc. 1997 Incentive Plan dated January 25, 1998 (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein). (10.11) Amendments to the Lowe's Companies, Inc. 1997 Incentive Plan dated September 17, 1998 (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein). (10.12) Lowe's/Eagle Stock Option Plan (filed as Exhibit 4.2 on the Company's Form S-8 filed April 7, 1999 (No. 333-75793) and incorporated by reference herein). (10.13) Lowe's Companies, Inc. Directors' Stock Option Plan (filed on the Company's Form S-8 dated October 21, 1999 (No. 333-89471) and incorporated by reference herein). (10.14) Lowe's Companies, Inc. Employee Stock Purchase Plan - Stock Options for Everyone (filed on the Company's Form S-8 dated May 2, 2000 (No. 333-36096) and incorporated by reference herein). (10.15) Lowe's Companies, Inc. 2001 Incentive Plan (filed on the Company's Form S-8 Dated November 15, 2001 (No. 333-73408) and incorporated by reference herein). (10.16) Indenture dated April 15, 1992 between the Company and Bank One, N.A., Successor Trustee to Chemical Bank, as Trustee (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (No. 33-47269) and incorporated by reference herein). (10.17) Amended and Restated Indenture, dated as of December 1, 1995, between the Company and Bank One, N.A., formerly known as The First National Bank of Chicago (filed as Exhibit 4.1 on Form 8-K dated December 15, 1995, and incorporated by reference herein). (10.18) First Supplemental Indenture, dated as of February 23, 1999, to the Amended and Restated Indenture dated as of December 1, 1995 between the Company and Bank One, N.A., formerly known as The First National Bank of Chicago (filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K dated April 19, 1999, and incorporated by reference herein). (10.19) Second Supplemental Indenture, dated as of October 19, 2001, to the Amended and Restated Indenture dated as of December 1, 1995 between the Company and Bank One, N.A., formerly known as The First National Bank of Chicago (filed as Exhibit 4.1 on Form 8-K dated October 25, 2001, and incorporated by reference herein). (10.20) Indenture between the Company and The Bank of New York, dated as of February 16, 2001 (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3 (No. 333-60434), and incorporated by reference herein). (10.21) Form of the Company's 6 3/8 % Senior Note due December 15, 2005 (filed as Exhibit 4.2 on Form 8-K dated December 15, 1995, and incorporated by reference herein). (10.22) Form of the Company's 6 7/8 % Debenture due February 20, 2028 (filed as Exhibit 4.2 on Form 8-K dated February 20, 1998, and incorporated by reference herein). (10.23) Form of the Company's 6 1/2% Debenture due March 15, 2029 (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended January 29, 1999, and incorporated by reference herein). (10.24) Form of the Company's 8 1/4% Notes due June 1, 2010 (filed as Exhibit 4.2 on Form 8-K dated June 8, 2000, and incorporated by reference herein). (10.25) Form of the Company's 7 1/2% Notes due December 15, 2005 (filed as Exhibit 4.2 on Form 8-K dated December 20, 2000, and incorporated by reference herein). (10.26) Form of the Company's 2.5% Liquid Yield Option Notes due February 16, 2021 (filed as Exhibit 4.2 to the Company's Registration Statement on Form S-3 (No. 333-60434), and incorporated by reference herein). (10.27) Form of the Company's Senior Convertible Notes due October 19, 2021 (filed as Exhibit 4.2 on Form 8-K dated October 25, 2001, and incorporated by reference herein). (10.28) Form of the Company's Management Continuity Agreement for Senior Officers. (10.29) Form of the Company's Management Continuity Agreement for Executive Officers. (13) Portions of the Annual Report to Security Holders for fiscal year ended February 1, 2002. (18) Letter Regarding Change in Accounting Method Dated November 10, 1999 (filed as Exhibit 18 to the Company's Form 10-Q dated December 13, 1999 and incorporated by reference herein). (21) List of Subsidiaries. (23) Consent of Deloitte & Touche LLP b) Reports on Form 8-K A report on Form 8-K was filed on October 25, 2001 by the registrant. Therein under Item 7, the Company filed certain exhibits in connection with the registrant's offering and sale on October 19, 2001, of $580,700,000 aggregate principal amount at maturity of Senior Convertible Notes pursuant to its Shelf Registration Statement on Form S-3 (File No. 333-55252). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Lowe's Companies, Inc. April 5, 2002 By: /s/ Robert A. Niblock Date Robert A. Niblock Executive Vice President and Chief Financial Officer April 5, 2002 By: /s/ Kenneth W. Black, Jr. Date Kenneth W. Black, Jr. Senior Vice President and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each of the directors of the Registrant whose signature appears below hereby appoints Robert A. Niblock, Kenneth W. Black, Jr. and Stephen A. Hellrung, and each of them severally, as his or her attorney-in-fact to sign in his or her name and behalf, in any and all capacities stated below, and to file with the Securities and Exchange Commission any and all amendments to this report on Form 10-K, making such changes in this report on Form 10-K as appropriate, and generally to do all such things in their behalf in their capacities as directors and/or officers to enable the Registrant to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission. /s/Robert L. Tillman Chairman of the Board of Directors, April 5, 2002 Robert L. Tillman Chief Executive Officer and Director Date /s/ Leonard L. Berry Director April 5, 2002 Leonard L. Berry Date /s/Peter C. Browning Director April 5, 2002 Peter C. Browning Date /s/Paul Fulton Director April 5, 2002 Paul Fulton Date /s/Dawn E. Hudson Director April 5, 2002 Dawn E. Hudson Date /s/Robert A. Ingram Director April 5, 2002 Robert A. Ingram Date /s/ Kenneth D. Lewis Director April 5, 2002 Kenneth D. Lewis Date /s/ Richard K. Lochridge Director April 5, 2002 Richard K. Lochridge Date /s/ Claudine Malone Director April 5, 2002 Claudine Malone Date /s/ Thomas D. O'Malley Director April 5, 2002 Thomas D. O'Malley Date /s/Robert G. Schwartz Director April 5, 2002 Robert G. Schwartz Date EX-10 3 exhibit1028e.txt MANAGEMENT CONTINUITY AGREEMENT FOR SENIOR OFFICERS EXHIBIT 10.28 MANAGEMENT CONTINUITY AGREEMENT FOR SENIOR OFFICERS AGREEMENT by and between Lowe's Companies, Inc., a North Carolina corporation (the "Company") and _______("Executive"), dated as of the 3rd day of May, 2001. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication of Executive, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change in Control and to encourage Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change in Control, and to provide Executive with compensation and benefits arrangements upon a Change in Control which ensure that the compensation and benefits expectations of Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change in Control Period (as defined in Section l(b)) on which a Change in Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or anticipation of a Change in Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change in Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change in Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to Executive that the Change in Control Period shall not be so extended. 2. Change in Control. For the purposes of this Agreement, a "Change in Control" shall mean: (a) individuals who, at the Effective Date, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest (as described in Rule 14a-11 under the Exchange Act ("Election Contest") or other actual or threatened solicitation of proxies or consents by or on behalf of any "person" (as such term is defined in Section 3(a)(9) of the Exchange Act and as used in Section 13(d)(3) and 14(d)(2) of the Exchange Act) other than the Board ("Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed an Incumbent Director; (b) any person becomes a "beneficial owner" (as defined in Rule 13d- 3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this subparagraph (b) shall not be deemed to be a Change in Control of the Company by virtue of any of the following acquisitions: (i) an acquisition directly by or from the Company or any affiliated companies; (ii) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated companies, (iii) an acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) an acquisition pursuant to a Non-Qualifying Transaction (as defined in subparagraph (c) below); or (c) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Reorganization"), or the sale or other disposition of all or substantially all of the Company's assets to an entity that is not an affiliate of the Company (a "Sale"), unless immediately following such Reorganization or Sale: (i) more than 60% of the total voting power of (A) the corporation resulting from such Reorganization or the corporation which has acquired all or substantially all of the assets of the Company (in either case, the "Surviving Corporation"), or (B) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by the Company Voting Securities that were outstanding immediately prior to such Reorganization or Sale (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Reorganization or Sale), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Reorganization or Sale, (ii) no person (other than (A) the Company, (B) any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation, or (C) a person who immediately prior to the Reorganization or Sale was the beneficial owner of 25% or more of the outstanding Company Voting Securities) is the beneficial owner, directly or indirectly, of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), and (iii) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Reorganization or Sale were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Reorganization or Sale (any Reorganization or Sale which satisfies all of the criteria specified in (i), (ii) and (iii) above shall be deemed to be a "Non-Qualifying Transaction"). 3. Employment Period. The Company hereby agrees to continue Executive in its employ, and Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to Executive hereunder, to use Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus opportunity (the "Annual Bonus") at least as favorable as that to which he would have been entitled under the annual bonus plan of the Company in effect for the last year prior to the Effective Date (annualized in the event that Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies ("Peer Executives"). (iv) Welfare Benefit Plans. During the Employment Period, Executive and/or Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under the welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) ("Welfare Plans") to the extent applicable generally to Peer Executives. (v) Expenses. During the Employment Period, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive in accordance with the policies, practices and procedures of the Company and its affiliated companies to the extent applicable generally to Peer Executives. (vi) Fringe Benefits. During the Employment Period, Executive shall be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company and its affiliated companies with respect to Peer Executives. 5. Termination of Employment. (a) Death, Retirement or Disability. Executive's employment shall terminate automatically upon Executive's death or Retirement (pursuant to the definition of Retirement set forth below) during the Employment Period. For purposes of this Agreement, "Retirement" shall mean Executive's voluntary termination of employment on or after the later of (i) 90 days after Executive has provided written notice to the Company's corporate secretary of his decision to retire, or (ii) Executive's attainment of age 60 (but shall not include Executive's voluntary termination after he has been given notice that he may be terminated for Cause). If the Company determines in good faith that the Disability of Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, Executive shall not have returned to full-time performance of Executive's duties. For purposes of this Agreement, "Disability" shall mean mental or physical disability as determined by the Board in accordance with standards and procedures similar to those under the Company's employee long-term disability plan, if any. At any time that the Company does not maintain such a long-term disability plan, Disability shall mean any illness or other physical or mental condition of Executive that renders Executive incapable of performing his customary and usual duties for the Company, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease or mental disorder which, in either case, has lasted or can reasonably be expected to last for at least 180 days out of a period of 365 consecutive days. The Board may require such medical or other evidence as it deems necessary to judge the nature and permanency of Executive's condition. (b) Cause. The Company may terminate Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of Executive to perform substantially Executive's duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness and specifically excluding any failure by Executive, after reasonable efforts, to meet performance expectations), after a written demand for substantial performance is delivered to Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that Executive has not substantially performed Executive's duties, or (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered "willful" unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. The cessation of employment of Executive shall not be deemed to be for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to Executive and Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. Executive's employment may be terminated by Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to Executive of any duties inconsistent in any material respect with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (iii) the failure by the Company (a) to continue in effect any compensation plan in which Executive participates as of the Effective Date that is material to Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or (b) to continue Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of Executive's participation relative to Peer Executives; or (iv) the Company's requiring Executive, without his consent, to be based at any office or location more than 35 miles from the office or location at which Executive was based on the date immediately prior to the Effective Date, or to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (v) any purported termination by the Company of Executive's employment otherwise than as expressly permitted by this Agreement; or (vi) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. Anything in this Agreement to the contrary notwithstanding, a termination by Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). If a dispute exists concerning the provisions of this Agreement that apply to Executive's termination of employment (other than a determination of "Cause" which shall be made as provided in Section 5(b)), the parties shall pursue the resolution of such dispute with reasonable diligence. Within five (5) days of such a resolution, any party owing any payments pursuant to the provisions of this Agreement shall make all such payments together with interest accrued thereon at the rate provided in Section 1274(b)(2)(B) of the Internal Revenue Code of 1986, as amended (the "Code"). The failure by either party to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of such party hereunder or preclude such party from asserting such fact or circumstance in enforcing such party's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if Executive's employment is terminated for any reason other than death, Retirement or Disability, the date specified in the Notice of Termination, and (ii) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of or Retirement of Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate Executive's employment other than for Cause or Disability or Executive shall terminate employment for Good Reason, then in consideration for services rendered by Executive prior to the Date of Termination: (i) the Company shall pay to Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) any accrued vacation pay to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the present value of the continuation of Executive's Base Salary for a period of two (2) years after the Date of Termination; such present value to be determined by applying discount rate equal to 120 percent of the applicable federal rate provided in Section 1274(d) of the Code, compounded semi-annually (the "Discount Rate"); and C. the amount equal to the present value of two (2) times the greater of (i) Executive's annual bonus for the year prior to the year in which the Change in Control occurred (the "Prior Year"), or (ii) Executive's target annual bonus for the year in which the Change in Control occurred (the "Current Year"); such present value to be determined by applying the Discount Rate and assuming two equal annual payments on each of the first and second anniversaries of the Date of Termination; and D. the amount equal to the present value of two (2) times the annual cost to the Company and Executive of participation in the Welfare Plans described in Section 4(b)(iv) of this Agreement with respect to either the Prior Year or the Current Year, which ever year in which such annual cost was higher; such present value to be determined by applying the Discount Rate and assuming 24 monthly payments beginning on the Date of Termination; and (ii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death, Retirement or Disability. If Executive's employment is terminated by reason of Executive's death, Retirement or Disability during the Employment Period, this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include without limitation, and Executive's estate and/or beneficiaries shall be entitled to receive, death, retirement or disability benefits then applicable to Executive. (c) Cause; Other than for Good Reason. If Executive's employment shall be terminated for Cause, or if Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement; Cost of Enforcement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by Executive about the amount of any payment pursuant to this Agreement). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by Parent or the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross- Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche LLP or such other certified public accounting firm reasonably acceptable to the Company as may be designated by Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to Executive within the later of (i) the due date for the payment of the Excise tax or (ii) five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment (or an additional Gross-Up Payment). Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest (to the extent applicable to the Excise Tax and the Gross-Up Payment) and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 9(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. No Restriction on Competition. Subject to common law fiduciary obligations and employment obligations imposed under state and federal law, including without limitation protection of confidential information and trade secrets, nothing herein is intended to or shall prohibit Executive from seeking or obtaining employment with a competitor of the Company following the Date of Termination. 11. Successors. (a) This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than-by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: At the Executive's address of record on file with the Company If to the Company: Lowe's Companies, Inc. 1605 Curtis Bridge Road Wilkesboro, North Carolina 28697 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right Executive or the Company may have hereunder, including, without limitation, the right of Executive to terminate employment for Good Reason pursuant to Section 5(c) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between Executive and the Company, the employment of Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, Executive's employment and/or this Agreement may be terminated by either Executive or the Company at any time prior to the Effective Date, in which case Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, Executive has hereunto set Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE _____________________________ (Name) LOWE'S COMPANIES, INC. By: __________________________ EX-10 4 exhibit1029e.txt MANAGEMENT CONTINUITY AGREEMENT FOR EXECUTIVE OFFICERS EXHIBIT 10.29 MANAGEMENT CONTINUITY AGREEMENT FOR EXECUTIVE OFFICERS AGREEMENT by and between Lowe's Companies, Inc., a North Carolina corporation (the "Company") and _____ ("Executive"), dated as of the 3rd day of May, 2001. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication of Executive, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change in Control and to encourage Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change in Control, and to provide Executive with compensation and benefits arrangements upon a Change in Control which ensure that the compensation and benefits expectations of Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change in Control Period (as defined in Section l(b)) on which a Change in Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or anticipation of a Change in Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change in Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change in Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to Executive that the Change in Control Period shall not be so extended. 2. Change in Control. For the purposes of this Agreement, a "Change in Control" shall mean: (a) individuals who, at the Effective Date, constitute the Board (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director after the Effective Date and whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest (as described in Rule 14a-11 under the Exchange Act ("Election Contest") or other actual or threatened solicitation of proxies or consents by or on behalf of any "person" (as such term is defined in Section 3(a)(9) of the Exchange Act and as used in Section 13(d)(3) and 14(d)(2) of the Exchange Act) other than the Board ("Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest, shall be deemed an Incumbent Director; (b) any person becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); provided, however, that the event described in this subparagraph (b) shall not be deemed to be a Change in Control of the Company by virtue of any of the following acquisitions: (i) an acquisition directly by or from the Company or any affiliated companies; (ii) an acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated companies, (iii) an acquisition by an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) an acquisition pursuant to a Non-Qualifying Transaction (as defined in subparagraph (c) below); or (c) the consummation of a reorganization, merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company that requires the approval of the Company's stockholders, whether for such transaction or the issuance of securities in the transaction (a "Reorganization"), or the sale or other disposition of all or substantially all of the Company's assets to an entity that is not an affiliate of the Company (a "Sale"), unless immediately following such Reorganization or Sale: (i) more than 60% of the total voting power of (A) the corporation resulting from such Reorganization or the corporation which has acquired all or substantially all of the assets of the Company (in either case, the "Surviving Corporation"), or (B) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by the Company Voting Securities that were outstanding immediately prior to such Reorganization or Sale (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Reorganization or Sale), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Reorganization or Sale, (ii) no person (other than (A) the Company, (B) any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation, or (C) a person who immediately prior to the Reorganization or Sale was the beneficial owner of 25% or more of the outstanding Company Voting Securities) is the beneficial owner, directly or indirectly, of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), and (iii) at least a majority of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Reorganization or Sale were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Reorganization or Sale (any Reorganization or Sale which satisfies all of the criteria specified in (i), (ii) and (iii) above shall be deemed to be a "Non-Qualifying Transaction"). 3. Employment Period. The Company hereby agrees to continue Executive in its employ, and Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) Executive's services shall be performed at the location where Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which Executive is entitled, Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to Executive hereunder, to use Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus opportunity (the "Annual Bonus") at least as favorable as that to which he would have been entitled under the annual bonus plan of the Company in effect for the last year prior to the Effective Date (annualized in the event that Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment Period, Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies ("Peer Executives"). (iv) Welfare Benefit Plans. During the Employment Period, Executive and/or Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under the welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) ("Welfare Plans") to the extent applicable generally to Peer Executives. (v) Expenses. During the Employment Period, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive in accordance with the policies, practices and procedures of the Company and its affiliated companies to the extent applicable generally to Peer Executives. (vi) Fringe Benefits. During the Employment Period, Executive shall be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company and its affiliated companies with respect to Peer Executives. 5. Termination of Employment. (a) Death, Retirement or Disability. Executive's employment shall terminate automatically upon Executive's death or Retirement (pursuant to the definition of Retirement set forth below) during the Employment Period. For purposes of this Agreement, "Retirement" shall mean Executive's voluntary termination of employment on or after the later of (i) 90 days after Executive has provided written notice to the Company's corporate secretary of his decision to retire, or (ii) Executive's attainment of age 60 (but shall not include Executive's voluntary termination after he has been given notice that he may be terminated for Cause). If the Company determines in good faith that the Disability of Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, Executive shall not have returned to full-time performance of Executive's duties. For purposes of this Agreement, "Disability" shall mean mental or physical disability as determined by the Board in accordance with standards and procedures similar to those under the Company's employee long-term disability plan, if any. At any time that the Company does not maintain such a long-term disability plan, Disability shall mean any illness or other physical or mental condition of Executive that renders Executive incapable of performing his customary and usual duties for the Company, or any medically determinable illness or other physical or mental condition resulting from a bodily injury, disease or mental disorder which, in either case, has lasted or can reasonably be expected to last for at least 180 days out of a period of 365 consecutive days. The Board may require such medical or other evidence as it deems necessary to judge the nature and permanency of Executive's condition. (b) Cause. The Company may terminate Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of Executive to perform substantially Executive's duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness and specifically excluding any failure by Executive, after reasonable efforts, to meet performance expectations), after a written demand for substantial performance is delivered to Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that Executive has not substantially performed Executive's duties, or (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of Executive, shall be considered "willful" unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. The cessation of employment of Executive shall not be deemed to be for Cause unless and until there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to Executive and Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. Executive's employment may be terminated by Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to Executive of any duties inconsistent in any material respect with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (iii) the failure by the Company (a) to continue in effect any compensation plan in which Executive participates as of the Effective Date that is material to Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or (b) to continue Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of Executive's participation relative to Peer Executives; or (iv) the Company's requiring Executive, without his consent, to be based at any office or location more than 35 miles from the office or location at which Executive was based on the date immediately prior to the Effective Date, or to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (v) any purported termination by the Company of Executive's employment otherwise than as expressly permitted by this Agreement; or (vi) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. Anything in this Agreement to the contrary notwithstanding, a termination by Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 30 days after the giving of such notice). If a dispute exists concerning the provisions of this Agreement that apply to Executive's termination of employment (other than a determination of "Cause" which shall be made as provided in Section 5(b)), the parties shall pursue the resolution of such dispute with reasonable diligence. Within five (5) days of such a resolution, any party owing any payments pursuant to the provisions of this Agreement shall make all such payments together with interest accrued thereon at the rate provided in Section 1274(b)(2)(B) of the Internal Revenue Code of 1986, as amended (the "Code"). The failure by either party to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of such party hereunder or preclude such party from asserting such fact or circumstance in enforcing such party's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if Executive's employment is terminated for any reason other than death, Retirement or Disability, the date specified in the Notice of Termination, and (ii) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of or Retirement of Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate Executive's employment other than for Cause or Disability or Executive shall terminate employment for Good Reason, then in consideration for services rendered by Executive prior to the Date of Termination: (i) the Company shall pay to Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, and (2) any accrued vacation pay to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the present value of the continuation of Executive's Base Salary for a period of three (3) years after the Date of Termination; such present value to be determined by applying discount rate equal to 120 percent of the applicable federal rate provided in Section 1274(d) of the Code, compounded semi-annually (the "Discount Rate"); and C. the amount equal to the present value of three (3) times the greater of (i) Executive's annual bonus for the year prior to the year in which the Change in Control occurred (the "Prior Year"), or (ii) Executive's target annual bonus for the year in which the Change in Control occurred (the "Current Year"); such present value to be determined by applying the Discount Rate and assuming three equal annual payments on each of the first, second and third anniversaries of the Date of Termination; and D. the amount equal to the present value of three (3) times the annual cost to the Company and Executive of participation in the Welfare Plans described in Section 4(b)(iv) of this Agreement with respect to either the Prior Year or the Current Year, which ever year in which such annual cost was higher; such present value to be determined by applying the Discount Rate and assuming 36 monthly payments beginning on the Date of Termination; and (ii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death, Retirement or Disability. If Executive's employment is terminated by reason of Executive's death, Retirement or Disability during the Employment Period, this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include without limitation, and Executive's estate and/or beneficiaries shall be entitled to receive, death, retirement or disability benefits then applicable to Executive. (c) Cause; Other than for Good Reason. If Executive's employment shall be terminated for Cause, or if Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement; Cost of Enforcement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against Executive or others. In no event shall Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by Executive about the amount of any payment pursuant to this Agreement). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by Parent or the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross- Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche LLP or such other certified public accounting firm reasonably acceptable to the Company as may be designated by Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to Executive within the later of (i) the due date for the payment of the Excise tax or (ii) five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment (or an additional Gross-Up Payment). Such notification shall be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest (to the extent applicable to the Excise Tax and the Gross-Up Payment) and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis and shall indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 9(c), Executive becomes entitled to receive any refund with respect to such claim, Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that Executive shall not be entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. No Restriction on Competition. Subject to common law fiduciary obligations and employment obligations imposed under state and federal law, including without limitation protection of confidential information and trade secrets, nothing herein is intended to or shall prohibit Executive from seeking or obtaining employment with a competitor of the Company following the Date of Termination. 11. Successors. (a) This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than-by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: At the Executive's address of record on file with the Company If to the Company: Lowe's Companies, Inc. 1605 Curtis Bridge Road Wilkesboro, North Carolina 28697 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right Executive or the Company may have hereunder, including, without limitation, the right of Executive to terminate employment for Good Reason pursuant to Section 5(c) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between Executive and the Company, the employment of Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, Executive's employment and/or this Agreement may be terminated by either Executive or the Company at any time prior to the Effective Date, in which case Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. IN WITNESS WHEREOF, Executive has hereunto set Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE _____________________________ (Name) LOWE'S COMPANIES, INC. By: __________________________ EX-13 5 ex13e.txt PORTIONS OF THE ANNUAL REPORT TO SECURITY HOLDERS Exhibit 13 - Portions of the Annual Report to Security Holders for the fiscal Year ended February 1, 2002 18 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Lowe's Companies, Inc. We have audited the accompanying consolidated balance sheets of Lowe's Companies, Inc. and subsidiaries (the "Company") as of February 1, 2002 and February 2, 2001, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three fiscal years in the period ended February 1, 2002, appearing on pages 25 through 38. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lowe's Companies, Inc. and subsidiaries at February 1, 2002 and February 2, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 2002 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Charlotte, North Carolina February 19, 2002 19 Disclosure Regarding Forward-Looking Statements Our Annual Report talks about our future, particularly in the sections titled "To Our 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 and existing home sales, the level of repairs, remodeling and additions to existing homes, commercial building activity, and the availability and cost of financing. An economic downturn affecting consumer confidence in making housing and home improvement expenditures, could affect sales because a portion 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 as well as the availability of sufficient labor to facilitate our growth. * Many of our products are commodities whose prices fluctuate erratically within an economic cycle, a condition especially 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 customers want depends on our vendors providing a reliable supply of inventory at competitive prices. * On a short-term basis, weather may affect sales of product groups like nursery, lumber, and building materials. 20 Pages 20 - 24 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, liquidity and capital resources during the three-year period ended February 1, 2002 (i.e., fiscal years 2001, 2000, and 1999). Fiscal years 2001 and 1999 contain 52 weeks of sales and expenses compared to Fiscal 2000, which contains 53 weeks. This discussion should be read in conjunction with the financial statements and financial statement footnotes included in this annual report. On May 25, 2001, the Company's Board of Directors approved a two-for- one split of the Company's common stock. As a result, shareholders received one additional share on June 29, 2001 for each share held as of the record date on June 8, 2001. The par value of the Company's common stock remained $0.50. All related financial information presented, including per share data, reflects the effects of the stock split. ACCOUNTING POLICIES AND ESTIMATES The following discussion and analysis of the results of operations and financial condition are based on the Company's financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, the results of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates. The Company's significant accounting polices are described in Note 1 to the consolidated financial statements. Management believes that the following accounting policies affect the more significant estimates used in preparing the consolidated financial statements. The Company records an inventory reserve for the loss associated with selling discontinued inventories at below cost. This reserve is based on management's current knowledge with respect to inventory levels, sales trends and historical experience relating to the liquidation of discontinued inventories. Management does not believe the Company's merchandise inventories are subject to significant risk of obsolescence in the near-term, and management has the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns could result in the need for additional reserves. The Company also records an inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrink results from previous physical inventories. Changes in actual shrink results from completed physical inventories could result in revisions to previously recorded shrink expense. Management believes it has sufficient current and historical knowledge to record reasonable estimates for both of these inventory reserves. The Company is self-insured for certain losses relating to worker's compensation, automobile, general and product liability claims. Self- insurance claims filed and claims incurred but not reported are accrued based upon management's estimates of the aggregate liability for uninsured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Although management believes it has the ability to adequately record estimated losses related to claims, it is possible that actual results could significantly differ from recorded self-insurance liabilities. OPERATIONS Net earnings for 2001 increased 26% to $1.02 billion or 4.6% of sales compared to $809.9 million or 4.3% of sales for 2000. Net earnings for 2000 increased 20% to $809.9 million or 4.3% of sales compared to $672.8 million or 4.2% of sales for 1999. Diluted earnings per share were $1.30 for 2001 compared to $1.05 for 2000 and $0.88 for 1999. Return on beginning assets was 9.0% for both 2001 and 2000, and return on beginning shareholders' equity was 18.6% for 2001 compared to 17.2% for 2000. The Company recorded sales of $22.1 billion in 2001, an 18% increase over 2000 sales of $18.8 billion. Sales for 2000 were 18% higher than 1999 levels. Comparable store sales increased 2.4% in 2001. The increases in sales are attributable to the Company's ongoing store expansion and relocation program. Stabilization in lumber and building material prices, as well as improved sales in most merchandising categories, brought about the comparable store sales increase. During the year, the Company experienced its strongest sales increases in building materials, paint, appliances and flooring. The following table presents sales and store information: 21 2001 2000 1999 Sales (in millions) $22,111 $18,779 $15,906 Sales Increases 18% 18% 19% Comparable Store Sales Increases 2% 1% 6% At end of year: Stores 744 650 576 Sales Floor Square Feet (in millions) 80.7 67.8 57.0 Average Store Size Square Feet (in thousands) 108 104 99 Gross margin in 2001 was 28.8% of sales compared to 28.2% in 2000. Both of these years showed improvement over the 27.5% rate achieved in 1999. Margin improvements have continued during 2001, primarily resulting from continued progress in line reviews, better buying and product mix improvements. Selling, general and administrative expenses (SG&A) were $3.9 billion or 17.7% of sales in 2001. SG&A in the two previous years were $3.3 and $2.8 billion or 17.8% and 17.4% of sales, respectively. During 2001, SG&A increased 17% compared to the 18% increase in sales. In 2000 SG&A increased 21% compared to the 18% sales increase. The leverage in SG&A during 2001 is primarily attributable to expense controls involving payroll and advertising costs. The increase in SG&A during 2000 was primarily attributable to an increase in store salaries combined with lower than expected sales levels. Store opening costs, which were expensed as incurred, were $139.9 million for 2001 compared to $131.8 and $98.4 million in 2000 and 1999, respectively. These costs are associated with the opening of 115 stores in 2001 (101 new and 14 relocated). This compares to 100 stores in 2000 (80 new and 20 relocated) and 91 stores in 1999 (60 new and 31 relocated). As a percentage of sales, store opening costs were 0.6% for 2001 compared to 0.7% and 0.6% in 2000 and 1999, respectively. Store opening costs averaged approximately $1.2 million, $1.1 million and $1.0 million per store in 2001, 2000 and 1999, respectively. Depreciation, reflecting continued fixed asset expansion, increased 26% to $516.8 million in 2001, compared to increases of 21% and 17% in 2000 and 1999, respectively. Depreciation as a percentage of sales was 2.4% for 2001, a slight increase from 2.2% in 2000 and 2.1% in 1999. Approximately 25% of new stores opened in the last three years have been leased, of which approximately 9% were under capital leases. Property, less accumulated depreciation, increased to $8.7 billion at February 1, 2002 compared to $7.0 billion at February 2, 2001. The increase in property resulted primarily from the Company's store expansion program, including land, building, store equipment, fixtures and displays. Net interest costs as a percent of sales were 0.8% for 2001, 0.7% for 2000 and 0.5% for 1999. Net interest costs totaled $173.5 million in 2001, $120.8 million in 2000, and $84.9 million in 1999. Interest costs have increased due to an increase in debt levels. Interest costs relating to capital leases were $40.4, $42.0 and $42.6 million for 2001, 2000 and 1999, respectively. See the discussion of liquidity and capital resources below. The Company's effective income tax rates were 37.0%, 36.8% and 36.7% in 2001, 2000, and 1999, respectively. The higher rates in 2001 and 2000 were primarily related to expansion into states with higher state income tax rates. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes the Company's significant contractual obligations and commercial commitments.
Contractual Payments Due by Period Obligations Less than 1-3 4-5 After 5 (In Thousands) Total 1 year years years years Short-term Debt $ 100,000 $ 100,000 $ - $ - $ - Long-term Debt 3,826,290 40,321 64,494 616,674 3,104,801 Capital Lease Obligations 851,533 59,345 118,020 114,210 559,958 Operating Leases 2,991,367 187,705 379,349 358,586 2,065,727 Total Contractual Cash Obligations $7,769,190 $ 387,371 $ 561,863 $1,089,470 $5,730,486
The primary sources of liquidity are cash flows from operating activities and certain financing activities, along with various lines of credit. Net cash provided by operating activities was $1.6 billion for 2001. This compares to $1.1 billion and $1.2 billion in 2000 and 1999, respectively. The increase in cash provided by operating activities during 2001 resulted primarily from increased net earnings, the funding of the Company's ESOP with the issuance of common stock versus cash in the prior year and improved inventory management. The decrease in cash provided by operating activities during 2000 was primarily the result of a year-over-year increase in inventories that exceeded the increase in accounts payable, which was partially offset by increased earnings and an increase in other operating liabilities. Working capital at February 1, 2002 was $1.9 billion compared to $1.2 billion at February 2, 2001. 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 22 $2.2 billion for 2001. This compares to $2.3 billion and $1.5 billion for 2000 and 1999, respectively. Retail selling space as of February 1, 2002 increased 19% over the selling space as of February 2, 2001. The February 2, 2001 selling space total of 67.8 million square feet represents a 19% increase over 1999. 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. Cash flows provided by financing activities were $929.5 million in 2001, $1.1 billion in 2000 and $583.5 million in 1999. The cash provided by financing activities in 2001 primarily resulted from the issuance of $580.7 million aggregate principal amount of senior convertible notes due October 2021 and $1.005 billion aggregate principal amount of convertible notes due February 2021. These cash inflows were offset by a decrease in cash due to the payment of $59.9 million in cash dividends, $63.8 million in scheduled debt maturities and the repayment of $150 million in short-term borrowings. In 2000, cash provided by financing activities included the issuance of $500 million principal amount of 8.25% notes due June 2010 and $500 million principal amount of 7.50% notes due December 2005. These proceeds were offset by a decrease in cash of $53.5 million from cash dividend payments and $61.3 million in scheduled debt repayments. Major financing activities during 1999 included cash received from the issuance of $400 million principal amount of 6.5% debentures due March 2029 and $348.3 million in net proceeds from a common stock offering. These proceeds were offset by cash dividend payments of $47.6 million and $108.3 million of scheduled debt repayments. The ratio of long-term debt to equity plus long-term debt was 36.2%, 33.3% and 27.6% as of the fiscal years ended 2001, 2000, and 1999, respectively. In October 2001, the Company issued $580.7 million aggregate principal of senior convertible notes at an issue price of $861.03 per note. Interest on the notes, at the rate of .8610% per year on the principal amount at maturity, is payable semiannually in arrears until October 2006. After that date, the Company will not pay cash interest on the notes prior to maturity. Instead, in October 2021, the maturity date of the notes, a holder will receive $1,000 per note, representing a yield to maturity of 1%. Holders may convert their notes into 17.212 shares of the Company's common stock, subject to adjustment, only if (1) the sale price of the Company's common stock reaches specified thresholds, (2) the credit rating of the notes is below a specified level, (3) the notes are called for redemption, or (4) specified corporate transactions have occurred. Holders may require the Company to purchase all or a portion of their notes in October 2003 or October 2006, at a price of $861.03 per note plus accrued cash interest, if any, or in October 2011, at a price of $905.06 per note. The Company may choose to pay the purchase price of the notes in cash or common stock or a combination of cash and common stock. In addition, if a change in control of the Company occurs on or before October 2006, each holder may require the Company to purchase for cash all or a portion of such holder's notes. The Company may redeem for cash all or a portion of the notes at any time on or after October 2006, at a price equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the redemption date. None of the conditions that permitted conversion were satisfied at February 1, 2002. In February 2001, the Company issued $1.005 billion aggregate principal of convertible notes at an issue price of $608.41 per note. Interest will not be paid on the notes prior to maturity in February 2021 at which time the holders will receive $1,000 per note, representing a yield to maturity of 2.5%. Holders may convert their notes at any time on or before the maturity date, unless the notes have been previously purchased or redeemed, into 16.448 shares of the Company's common stock per note. Holders of the notes may require the Company to purchase all or a portion of their notes in February 2004 at a price of $655.49 per note or in February 2011 at a price of $780.01 per note. On either of these dates, the Company may choose to pay the purchase price of the notes in cash or common stock, or a combination of cash and common stock. In addition, if a change in the control of the Company occurs on or before February 2004, each holder may require the Company to purchase, for cash, all or a portion of the holders' notes. In August 2001, the Company completed an $800 million senior credit facility. The facility is split into a $400 million five-year tranche, expiring in August 2006 and a $400 million 364-day tranche, expiring in August 2002, which is renewable annually. The facility is used to support the Company's $800 million commercial paper program and for short-term borrowings. Any loans made are priced based upon market conditions at the time of funding in accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants which include maintenance of specific financial ratios, among others. The Company was in compliance with these covenants at February 1, 23 2002. Fifteen banking institutions are participating in the $800 million senior credit facility and, as of February 1, 2002, there were no outstanding loans under the facility. This facility replaces a $300 million revolving credit agreement. At February 2, 2001, the Company had $149.8 million of commercial paper outstanding supported by the $300 million facility. The Company has several lines of credit available which can provide additional liquidity. In December 2001, the Company completed a $100 million revolving credit and security agreement, expiring in December 2002, and renewable annually with a financial institution. The Company intends to renew this facility in December 2002. Interest rates under this agreement are determined at the time of borrowing based on market conditions in accordance with the terms of the agreement. The Company had $100 million outstanding at February 1, 2002 under this agreement, and $134.7 million in accounts receivable pledged as collateral. This agreement replaced a $100 million revolving credit agreement which expired in November 2001. In addition, $25 million was available as of February 1, 2002, and $100 million was available on February 2, 2001, 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 February 1, 2002 or February 2, 2001. Seven banks have extended lines of credit aggregating $276.5 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 .25% to .50% per annum are paid on the amounts of standby letters of credit issued. Outstanding letters of credit totaled $162.2 million as of February 1, 2002 and $133.2 million as of February 2, 2001. The Company has three operating lease agreements whereby lessors have committed to purchase land, fund construction costs, and lease properties to the Company. The initial lease terms are five years with two five-year renewal options. One initial term expires in 2005 and the two remaining initial lease terms expire in 2006. The agreements contain guaranteed residual values up to a portion of the properties' original cost and purchase options at original cost for all properties under the agreements. The agreements contain certain restrictive covenants which include maintenance of specific financial ratios, among others. The Company has financed four regional distribution centers, two of which are under construction, and fourteen retail stores through these lease agreements. Total commitments under these operating lease agreements as of February 1, 2002 and February 2, 2001, were $329.4 and $236.1 million, respectively. Outstanding advances under those commitments were $201.1 and $167.7 million as of February 1, 2002 and February 2, 2001. Payments related to these lease agreements have been included in the significant contractual obligations and commercial commitments table presented previously. The Company's 2002 capital budget is currently at $2.8 billion, inclusive of approximately $307 million of operating or capital leases. Approximately 96% of this planned commitment is for store expansion and new distribution centers. Expansion plans for 2002 consist of approximately 123 stores, including approximately 8 relocations of older stores. This planned expansion is expected to increase sales floor square footage by approximately 18%. Approximately 4% of the 2002 projects will be leased and 96% will be owned. At February 1, 2002, the Company operated seven regional distribution centers. During 2001, the Company began construction on two additional regional distribution centers. The first is located in Cheyenne, Wyoming and is expected to be operational in the third quarter of 2002 and the second is located in Northampton, North Carolina, which expected to be operational in late 2002. The Company believes that funds from operations, funds from debt issuances, leases and existing short-term lines of credit will be adequate to finance the 2002 expansion plan and other operating requirements. However, general economic downturns, fluctuations in the prices of products, unanticipated impact arising from competition and adverse weather conditions could have an effect on funds generated from operations and our expansion plans. In addition, the availability of funds through the issuance of commercial paper and new debt could be adversely affected due to a debt rating downgrade or a deterioration of certain financial ratios. The $100 million revolving credit and security agreement requires a minimum investment grade rating in order to receive funding. There are no provisions in any agreements that would require early cash settlement of existing debt or leases as a result of a downgrade in the Company's debt rating or a decrease in the Company's stock price. Holders of the Company's $580.7 million Senior Convertible notes may convert their notes into the Company's common stock if the minimum investment grade rating is not maintained. 24 MARKET RISK The Company's major market risk exposure is the potential loss arising from the impact of changing interest rates on 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 following tables summarize the Company's market risks associated with long-term debt, excluding capitalized leases. The tables present principal cash outflows and related interest rates by year of maturity, excluding unamortized original issue discounts as of February 1, 2002 and February 2, 2001. The fair values included below were determined using quoted market rates or interest rates that are currently available to the Company on debt with similar terms and remaining maturities. Long-Term Debt Maturities by Fiscal Year February 1, 2002 Average Average Fixed Interest Variable Interest (Dollars in Millions) Rate Rate Rate Rate 2002 $ 40.2 7.65% $ 0.1 1.55% 2003 8.7 7.66 0.1 1.55 2004 55.6 7.98 0.1 1.55 2005 608.9 7.32 0.1 1.55 2006 7.7 7.70 - NA Thereafter 3,102.7 4.54% 2.1 1.65% Total $ 3,823.8 $ 2.5 Fair Value $ 3,811.3 $ 2.5 Long-Term Debt Maturities by Fiscal Year February 2, 2001 Average Average Fixed Interest Variable Interest (Dollars in Millions) Rate Rate Rate Rate 2001 $ 26.1 7.58% $ 0.1 4.60% 2002 43.2 7.63 0.1 4.60 2003 11.9 7.58 0.1 4.60 2004 59.1 7.95 0.1 4.60 2005 612.7 7.32 0.1 4.60 Thereafter 1,534.0 7.30% 2.1 4.27% Total $ 2,287.0 $ 2.6 Fair Value $ 2,269.1 $ 2.6 RECENT ACCOUNTING PRONOUNCEMENTS In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed of," but retains many of its fundamental provisions. Additionally, this statement expands the scope of discontinued operations to include more disposal transactions. SFAS No. 144 will be effective for the Company for the fiscal year beginning February 2, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143 will require the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if the company is legally obligated to perform retirement activities at the end of the related asset's life. SFAS No. 143 is effective for the Company for the fiscal year beginning February 1, 2003. Management does not believe that the initial adoption of these standards will have a material impact on the Company's financial statements. 25 Lowe's Companies, Inc. Consolidated Statements of Earnings (In Thousands, Except Per Share Data)
February 1, % February 2, % January 28, % Years Ended on 2002 Sales 2001 Sales 2000 Sales Net Sales $22,111,108 100.0% $18,778,559 100.0% $15,905,595 100.0% Cost of Sales 15,743,267 71.2 13,487,791 71.8 11,525,013 72.5 Gross Margin 6,367,841 28.8 5,290,768 28.2 4,380,582 27.5 Expenses: Selling, General and Administrative (Note 5)3,913,355 17.7 3,348,060 17.8 2,772,428 17.4 Store Opening Costs 139,870 0.6 131,825 0.7 98,448 0.6 Depreciation 516,828 2.4 408,618 2.2 337,359 2.1 Interest (Note 15) 173,537 0.8 120,825 0.7 84,852 0.5 Nonrecurring Merger Costs (Note 2) - - - - 24,378 0.2 Total Expenses 4,743,590 21.5 4,009,328 21.4 3,317,465 20.8 Pre-Tax Earnings 1,624,251 7.3 1,281,440 6.8 1,063,117 6.7 Income Tax Provision (Note 13) 600,989 2.7 471,569 2.5 390,322 2.5 Net Earnings $ 1,023,262 4.6% $809,871 4.3% $672,795 4.2% Basic Earnings Per Share (Note 9) $1.33 $1.06 $0.88 Diluted Earnings Per Share (Note 9) $1.30 $1.05 $0.88 Cash Dividends Per Share $0.08 $0.07 $0.06 See accompanying notes to consolidated financial statements.
26 Lowe's Companies, Inc. Consolidated Balance Sheets (In Thousands, Except Per Value Data)
February 1, % February 2, % 2002 Total 2001 Total Assets Current Assets: Cash and Cash Equivalents $798,839 5.8% $455,658 4.0% Short-Term Investments (Note 3) 54,389 0.4 12,871 0.1 Accounts Receivable - Net (Notes 1 and 6) 165,578 1.2 160,985 1.4 Merchandise Inventory (Note 1) 3,610,776 26.3 3,285,370 28.9 Deferred Income Taxes (Note 13) 92,504 0.7 81,044 0.7 Other Current Assets 198,306 1.4 161,498 1.5 Total Current Assets 4,920,392 35.8 4,157,426 36.6 Property, Less Accumulated Depreciation (Notes 4 and 7) 8,653,439 63.0 7,034,960 61.9 Long-Term Investments (Note 3) 21,660 0.2 34,690 0.3 Other Assets (Note 5) 140,728 1.0 131,091 1.2 Total Assets $13,736,219 100.0% $11,358,167 100.0% Liabilities and Shareholders' Equity Current Liabilities: Short-Term Borrowings (Note 6) $100,000 0.7% $249,829 2.2% Current Maturities of Long-Term Debt (Note 7) 59,259 0.5 42,341 0.4 Accounts Payable 1,714,776 12.5 1,714,370 15.1 Employee Retirement Plans (Note 12) 126,339 0.9 75,656 0.7 Accrued Salaries and Wages 220 885 1.6 166,392 1.4 Other Current Liabilities (Note 5) 795,571 5.8 662,410 5.8 Total Current Liabilities 3,016,830 22.0 2,910,998 25.6 Long-Term Debt, Excluding Current Maturities (Notes 7, 8 and 11) 3,734,011 27.2 2,697,669 23.8 Deferred Income Taxes (Note 13) 304 697 2.2 251,450 2.2 Other Long-Term Liabilites 6,239 - 3,165 - Total Liabilities 7,061,777 51.4 5,863,282 51.6 Shareholders' Equity (Note 10): Preferred Stock - $5 Par Value, none issued - - - - Common Stock - $.50 Par Value; Shares Issued and Outstanding February 1, 2002 775,714 February 2, 2001 766,484 387,857 2.8 383,242 3.4 Capital in Excess of Par Value 1,804,161 13.2 1,595,148 14.0 Retained Earnings 4,481,734 32.6 3,518,356 31.0 Unearned Compensation-Restricted Stock Awards - - (2,312) - Accumulated Other Comprehensive Income 690 - 451 - Total Shareholders' Equity 6,674,442 48.6 5,494,885 48.4 Total Liabilities and Shareholders' Equity $13,736,219 100.0% $11,358,167 100.0% See accompanying notes to consolidated financial statements.
27 Lowe's Companies, Inc. Consolidated Statements of Shareholders' Equity (In Thousands)
Unearned Accumulated Capital in Compensation Other Total Common Stock Excess of Retained Restricted Comprehensive Shareholders' Shares Amount Par Value Earnings Stock Awards Income(Loss) Equity Balance January 29, 1999 748,776 $374,388 $1,138,622 $2,136,727 $(30,387) $417 $3,619,767 Comprehensive Income: Net Earnings 672,795 Other Comprehensive Income, Net of Income Taxes and Reclassification Adjustments: Unrealized Loss on Available-for- Sale Securities (Note 10) (837) Total Comprehensive Income 671,958 Tax Effect of Non-qualified Stock Options Exercised 9,888 9,888 Cash Dividends (47,558) (47,558) Common Stock Offering 12,414 6,206 342,094 348,300 Employee Stock Options Exercised (Note 10) 1,664 832 20,204 21,036 Stock Issued to ESOP (Notes 12 and 15) 2,156 1,078 58,434 59,512 Shares issued to Directors (Note 10) 32 16 35 51 Unearned Compensation - Restricted Stock Awards (Note 10) (324) (162) (4,840) 17,519 12,517 Balance January 28, 2000 764,718 $382,358 $1,564,437 $2,761,964 $(12,868) $(420) $4,695,471 Comprehensive Income: Net Earnings 809,871 Other Comprehensive Income, Net of Income Taxes and Reclassification Adjustments: Unrealized Gain on Available-for- Sale Securities (Note 10) 871 Total Comprehensive Income 810,742 Tax Effect of Non-qualified Stock Options Exercised 7,465 7,465 Cash Dividends (53,479) (53,479) Employee Stock Options Exercised (Note 10) 1,256 628 11,432 12,060 Directors' Stock Options Exercised (Note 10) 144 72 358 430 Employee Stock Purchase Plan (Note 10) 874 438 14,451 14,889 Unearned Compensation - - Restricted Stock Awards (Note 10) (508) (254) (2,995) 10,556 7,307 Balance February 2, 2001 766,484 $383,242 $1,595,148 $3,518,356 $(2,312) $451 $5,494,885 Comprehensive Income: Net Earnings 1,023,262 Other Comprehensive Income, Net of Income Taxes and Reclassification Adjustments: Unrealized Gain on Available-for-Sale Securities (Note 10) 239 Total Comprehensive Income 1,023,501 Tax Effect of Non-qualified Stock Options Exercised 35,019 35,019 Cash Dividends (59,884) (59,884) Employee Stock Options Exercised (Note 10) 5,622 2,811 74,709 77,520 Directors' Stock Options Excercised (Note 10) 32 16 87 103 Stock Issued to ESOP (Notes 12 and 15) 1,946 973 62,476 63,449 Employee Stock Purchase Plan (Note 10) 1,688 844 37,093 37,937 Unearned Compensation - Restricted Stock Awards (Note 10) (58) (29) (371) 2,312 1,912 Balance February 1, 2002 775,714 $387,857 $1,804,161 $4,481,734 $ - $690 $6,674,442 See accompanying notes to consolidated financial statements.
28 Lowe's Companies, Inc. Consolidated Statements of Cash Flows (In Thousands)
February 1, February 2, January 28, Years Ended On 2002 2001 2000 Cash Flows From Operating Activities: Net Earnings $1,023,262 $809,871 $672,795 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Depreciation and Amortization 534,102 409,511 337,822 Deferred Income Taxes 41,658 23,284 13,439 Loss on Disposition/Writedown of Fixed and Other Assets 38,930 22,733 51,520 Tax Effect of Stock Options Exercised 35,019 7,465 9,888 Changes in Operating Assets and Liabilities: Accounts Receivable - Net (4,593) (13,084) (3,973) Merchandise Inventory (325,406) (473,009) (427,661) Other Operating Assets (36,792) (59,651) (50,324) Accounts Payable 406 158,419 335,408 Employee Retirement Plans 113,823 (26,357) 76,024 Other Operating Liabilities 192,640 270,527 182,223 Net Cash Provided by Operating Activities 1,613,049 1,129,709 1,197,161 Cash Flows from Investing Activities: (Increase) Decrease in Investment Assets: Short-Term Investments - Net (29,958) 75,738 (50,998) Purchases of Long-Term Investments (1,042) (13,951) (12,413) Proceeds from Sale/Maturity of Long-Term Investments 2,878 750 2,531 Increase in Other Long-Term Assets (13,661) (51,675) (53,028) Fixed Assets Acquired (2,199,108) (2,331,922) (1,472,348) Proceeds from the Sale of Fixed and Other Long-Term Assets 41,557 71,399 67,837 Net Cash Used in Investing Activities (2,199,334) (2,249,661) (1,518,419) Cash Flows from Financing Activities: Net (Decrease) Increase in Short-Term Borrowings (149,829) 157,354 (24,600) Long-Term Debt Borrowings 1,087,071 1,014,878 394,588 Repayment of Long-Term Debt (63,762) (61,285) (108,309) Proceeds from Stock Offering - - 348,300 Proceeds from Employee Stock Purchase Plan 37,937 14,889 - Proceeds from Stock Options Exercised 77,933 12,131 21,085 Cash Dividend Payments (59,884) (53,479) (47,558) Net Cash Provided by Financing Activities 929,466 1,084,488 583,506 Net Increase (Decrease) in Cash and Cash Equivalents 343,181 (35,464) 262,248 Cash and Cash Equivalents, Beginning of Year 455,658 491,122 228,874 Cash and Cash Equivalents, End of Year $798,839 $455,658 $491,122 See accompanying notes to consolidated financial statements.
29 LOWE'S COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 1, 2002, FEBRUARY 2, 2001 AND JANUARY 28, 2000 Pages 29 - 38 NOTE 1 - Summary of Significant Accounting Policies: The Company is the world's second largest home improvement retailer and operated 744 stores in 42 states at February 1, 2002. Below are those accounting policies considered to be significant. Fiscal Year - The Company's fiscal year ends on the Friday nearest January 31. The fiscal years ended February 1, 2002 and January 28, 2000 had 52 weeks. The fiscal year ended February 2, 2001 had 53 weeks. All references herein for the years 2001, 2000 and 1999 represent the fiscal years ended February 1, 2002, February 2, 2001 and January 28, 2000, respectively. Stock Split - On May 25, 2001, the Company's Board of Directors approved a two- for-one split of the Company's common stock. As a result, shareholders received one additional share on June 29, 2001 for each share held as of the record date on June 8, 2001. The par value of the Company's common stock remained $0.50. All related financial information presented, including per share data, reflects the effects of the stock split. 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 accordance with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Company bases these estimates on historical results and various other assumptions believed to be reasonable, the results of which form the basis for making estimates concerning the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these 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 cash balances, not expected to be used in current operations, in financial instruments that 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 or that are expected to be used in current operations, are classified as short-term investments. All other investments are classified as long-term. Investments consist primarily of tax-exempt notes and bonds, corporate notes, 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. Derivative Financial Instruments - The Company does not use derivative financial instruments for trading purposes. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138, with the fiscal year beginning February 3, 2001. The adoption of this standard had no material impact on the Company's financial statements. Accounts Receivable - The majority of accounts receivable arise from sales to commercial business customers. The allowance for doubtful accounts is based on historical experience and a review of existing receivables. The allowance for doubtful accounts was $4.9 million at February 1, 2002 and $2.0 million at February 2, 2001. Sales generated through the Company's private label credit cards 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 (GECC), consumer credit is extended directly to customers by the Bank and all credit program related services are performed and controlled directly by the Bank. The Company has the option, but no obligation, at the end of the agreement to purchase the receivables. The total portfolio of receivables held by GECC approximated $2.9 billion at February 1, 2002 and $2.5 billion at February 2, 2001. Merchandise Inventory - Inventory is stated at the lower of cost or market using the first-in, first-out method of inventory accounting. The cost of inventory also includes certain processing costs associated with the preparation of inventory for resale. 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 are removed from the accounts with gains and losses reflected in earnings. 30 Depreciation is provided over the estimated useful lives of the depreciable assets. Assets are generally depreciated using the straight-line method. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the 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. Self-Insurance - The Company is self-insured for certain losses relating to workers' compensation, automobile, general and product liability claims. The Company has stop loss coverage to limit the exposure arising from these claims. Self-insurance losses for claims filed and claims incurred but not reported are accrued based upon the Company's estimates of the aggregate liability for uninsured claims incurred using actuarial assumptions followed in the insurance industry and the Company's historical experience. 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 circumstances indicate the carrying amount of the assets may not be recoverable. 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 made for the impairment of the assets based on the assets' estimated fair value. Impairment losses for closed real estate are made when the carrying value of the assets exceed fair value. The impairment loss is measured based on the excess of carrying value over estimated fair value. When a leased location is closed or becomes impaired, a provision is made 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. Revenue Recognition - The Company recognizes revenues when sales transactions occur and customers take possession of the merchandise. A provision for anticipated merchandise returns is provided in the period that the related sales are recorded. Advertising - Costs associated with advertising are charged to operations as incurred. Advertising expenses were $94.3, $114.1 and $69.2 million for 2001, 2000 and 1999, respectively. Stock Based Compensation - The Company applies the intrinsic value method of accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for stock-based compensation where the option price approximated the fair market value of the stock on the date of grant, other than for restricted stock grants. Recent Accounting Pronouncements - In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed of," but retains many of its fundamental provisions. Additionally, this statement expands the scope of discontinued operations to include more disposal transactions. SFAS No. 144 will be effective for the Company for the fiscal year beginning February 2, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets". SFAS No. 143 will require the accrual, at fair value, of the estimated retirement obligation for tangible long-lived assets if the company is legally obligated to perform retirement activities at the end of the related asset's life. SFAS No. 143 is effective for the Company for the fiscal year beginning February 1, 2003. Management does not believe that the initial adoption of these standards will have a material impact on the Company's financial statements. 31 NOTE 2 - Merger: The Company completed its merger with Eagle Hardware & Garden, Inc. (Eagle) on April 2, 1999. The transaction 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 Company incurred $24.4 million of merger related costs which were charged to operations during the first quarter of fiscal year 1999. These costs consisted of $15.7 million relating to the write-off 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 banking and other miscellaneous fees. NOTE 3 - Investments: The Company's investment securities are classified as available-for-sale. The amortized cost, gross unrealized holding gains and losses and fair values of the investments at February 1, 2002 and February 2, 2001 are as follows: February 1, 2002 Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair Type Cost Gains Losses Value Municipal Obligations $ 8,664 $ 104 - $ 8,768 Money Market Preferred Stock 40,000 - - 40,000 Corporate Notes 4,952 166 - 5,118 Federal Agency Note 500 3 - 503 Classified as Short-Term 54,116 273 - 54,389 Municipal Obligations 15,980 488 - 16,468 Corporate Notes 4,891 300 - 5,192 Classified as Long-Term 20,871 788 - 21,660 Total $74,987 $1,061 - $76,049 February 2, 2001 Gross Gross (In Thousands) Amortized Unrealized Unrealized Fair Type Cost Gains Losses Value Municipal Obligations $12,836 $ 51 $16 $12,871 Classified as Short-Term 12,836 51 16 12,871 Municipal Obligations 23,800 276 1 24,075 Federal Agency Note 500 10 - 510 Corporate Notes 9,756 349 - 10,105 Classified as Long-Term 34,056 635 1 34,690 Total $46,892 $686 $17 $47,561 The proceeds from sales of available-for-sale securities were $1.0, $8.6 and $17.1 million for 2001, 2000 and 1999, respectively. Gross realized gains and losses on the sale of available-for-sale securities were not significant for any of the periods presented. The municipal obligations and corporate notes classified as long-term at February 1, 2002 will mature in one to five years. NOTE 4 - Property and Accumulated Depreciation: Property is summarized below by major class: February 1, February 2, (In Thousands) 2002 2001 Cost: Land $ 2,622,803 $ 2,150,206 Buildings 4,276,713 3,465,163 Store, Distribution and Office Equipment 3,106,099 2,623,822 Leasehold Improvements 626,737 389,140 Total Cost 10,632,352 8,628,331 Accumulated Depreciation and Amortization (1,978,913) (1,593,371) Net Property $8,653,439 $7,034,960 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 $460.9 and $454.4 million in assets under capital leases at February 1, 2002 and February 2, 2001, respectively. NOTE 5 - Impairment and Store Closing Costs: When the Company's management makes the decision to close or relocate a store, the carrying value of the related assets is evaluated in relation to their expected future cash flows. Losses related to impairment of long-lived assets to be disposed of are recognized when the expected future cash flows are less than the assets' carrying value. If the carrying value of the assets is greater than the expected future cash flows, a provision is made for the impairment of the assets based on the excess of carrying value over fair value. The fair value of the assets is generally based on internal or external appraisals and the Company's historical experience. Provisions for impairment and store closing costs are included in selling, general and administrative expenses. The carrying amount of closed store real estate is included in other assets and amounted to $81.6 and $76.4 million at February 1, 2002 and February 2, 2001, respectively. When leased locations are closed or become impaired, a liability is recognized for the net present value of future lease obligations 32 net of anticipated sublease income. The following table illustrates this liability and the respective changes in the obligation, which is included in other current liabilities in the consolidated balance sheet. Lease Liability Balance at January 29, 1999 $18,433,701 Accrual for Store Closing Costs 4,489,091 Lease Payments, Net of Sublease Income (5,483,037) Balance at January 28, 2000 17,439,755 Accrual for Store Closing Costs 8,246,117 Lease Payments, Net of Sublease Income (6,250,011) Balance at February 2, 2001 19,435,861 Accrual for Store Closing Costs 6,262,682 Lease Payments, Net of Sublease Income (8,646,099) Balance at February 1, 2002 $17,052,444 NOTE 6 - Short-term Borrowings and Lines of Credit: The Company has an $800 million senior credit facility. The facility is split into a $400 million five-year tranche, expiring in August 2006 and a $400 million 364-day tranche, expiring in August 2002, which is renewable annually. The facility is used to support the Company's $800 million commercial paper program and for short-term borrowings. Borrowings made are priced based upon market conditions at the time of funding in accordance with the terms of the senior credit facility. The senior credit facility contains certain restrictive covenants which include maintenance of specific financial ratios, among others. The Company was in compliance with these covenants at February 1, 2002. Fifteen banking institutions are participating in the $800 million senior credit facility and as of February 1, 2002, there were no outstanding loans under the facility. This facility replaced a $300 million revolving credit agreement in August 2001. The Company intends to renew the 364-day tranche in August 2002. At February 2, 2001, the Company had $149.8 million of commercial paper outstanding supported by the $300 million facility. The Company also has a $100 million revolving credit and security agreement, expiring in December 2002 and renewable annually, with a financial institution. Interest rates under this agreement are determined at the time of borrowing based on market conditions in accordance with the terms of the agreement. The Company had $100 million outstanding at February 1, 2002 under this agreement. The Company intends to renew this facility in December 2002. At February 1, 2002, the Company had $134.7 million in accounts receivable pledged as collateral under this agreement. This agreement replaced a $100 million revolving credit agreement which expired in November 2001. The Company had $100 million outstanding and had $145.0 million in accounts receivable pledged as collateral at February 2, 2001 under the former agreement. In addition, $25 million was available as of February 1, 2002, and $100 million was available on February 2, 2001, 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 February 1, 2002 or February 2, 2001. Seven banks have extended lines of credit aggregating $276.5 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 .25% to .50% per annum are paid on the amounts of standby letters of credit. Outstanding letters of credit totaled $162.2 million as of February 1, 2002 and $133.2 million as of February 2, 2001. The interest rate on short-term borrowings outstanding at February 1, 2002 was 1.86%. At February 2, 2001, the weighted average interest rate on short-term borrowings was 6.40%. NOTE 7 - Long-Term Debt: Fiscal Year (In Thousands) of Final February 1, February 2, Debt Category Interest Rates Maturity 2002 2001 Secured Debt:1 Mortgage Notes 7.00% to 9.25% 2028 $ 61,631 $ 93,395 Other Notes 1.55% to 8.00% 2020 4,764 7,117 Unsecured Debt: Debentures 6.50% to 6.88% 2029 691,790 691,481 Notes 7.50% to 8.25% 2010 993,692 992,583 Medium Term Notes Series A 7.08% to 8.20% 2023 106,000 121,000 Medium Term Notes2 Series B 6.70% to 7.59% 2037 266,363 266,215 Senior Notes 6.38% 2005 99,597 99,493 Convertible Notes 0.9% to 2.5% 2021 1,102,677 - Capital Leases 6.58% to 19.57% 2029 466,756 468,726 Total Long-Term Debt 3,793,270 2,740,010 Less Current Maturities 59,259 42,341 Long-Term Debt, Excluding Current Maturities $3,734,011 $2,697,669 33 Debt maturities, exclusive of capital leases, for the next five fiscal years are as follows (in millions): 2002, $40.3; 2003, $8.8; 2004, $55.7; 2005, $609.0; 2006, $7.7. The Company's debentures, senior notes, medium term notes and convertible notes contain certain financial covenants, including the maintenance of specific financial ratios, among others. The Company was in compliance with all covenants in these agreements at February 1, 2002 and February 2, 2001. In October 2001, the Company issued $580.7 million aggregate principal of senior convertible notes at an issue price of $861.03 per note. Interest on the notes, at the rate of 0.8610% per year on the principal amount at maturity, is payable semiannually in arrears until October 2006. After that date, the Company will not pay cash interest on the notes prior to maturity. Instead, in October 2021 when the notes mature, a holder will receive $1,000 per note, representing a yield to maturity of 1%. Holders may convert their notes into 17.212 shares of the Company's common stock, subject to adjustment, only if: the sale price of the Company's common stock reaches specified thresholds, the credit rating of the notes is below a specified level, the notes are called for redemption, or specified corporate transactions have occurred. Holders may require the Company to purchase all or a portion of their notes in October 2003 or October 2006, at a price of $861.03 per note plus accrued cash interest, if any, or in October 2011, at a price of $905.06 per note. The Company may choose to pay the purchase price of the notes in cash or common stock or a combination of cash and common stock. In addition, if a change in control of the Company occurs on or before October 2006, each holder may require the Company to purchase for cash all or a portion of such holder's notes. The Company may redeem for cash all or a portion of the notes at any time beginning October 2006, at a price equal to the sum of the issue price plus accrued original issue discount and accrued cash interest, if any, on the redemption date. The conditions that permit conversion were not satisfied at February 1, 2002. In February 2001, the Company issued $1.005 billion aggregate principal of convertible notes at an issue price of $608.41 per note. Interest will not be paid on the notes prior to maturity in February 2021, at which time the holders will receive $1,000 per note, representing a yield to maturity of 2.5%. Holders may convert their notes at any time on or before the maturity date, unless the notes have been previously purchased or redeemed, into 16.448 shares of the Company's common stock per note. Holders of the notes may require the Company to purchase all or a portion of their notes in February 2004 at a price of $655.49 per note or in February 2011 at a price of $780.01 per note. On either of these dates, the Company may choose to pay the purchase price of the notes in cash or common stock, or a combination of cash and common stock. In addition, if a change in control of the Company occurs on or before February 2004, each holder may require the Company to purchase, for cash, all or a portion of the holder's notes. Notes: 1. Real properties pledged as collateral for secured debt had net book values at February 1, 2002, as follows: mortgage notes - $134.5 million and other notes - $26.6 million. 2. Approximately 37% of these Medium Term Notes may be put at the option of the holder on either the tenth or twentieth anniversary date of the issue at par value. None of these notes are currently putable. NOTE 8 - Financial Instruments: Cash and cash equivalents, accounts receivable, short-term borrowings, trade accounts payable, and accrued liabilities are reflected in the financial statements at cost which approximates fair value. Short and long-term investments, classified as available-for-sale securities, are reflected in the financial statements at fair value. Estimated fair values for long-term debt have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is 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. The fair value of the Company's long-term debt excluding capital leases is as follows: February 1, 2002 February 2, 2001 Carrying Fair Carrying Fair (In Thousands) Amount Value Amount Value Liabilities: Long-Term Debt (Excluding Capital Leases) $3,326,514 $3,813,861 $2,271,284 $2,271,729 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. 34 NOTE 9 - 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 earnings per share is calculated based on the weighted average shares of common stock as adjusted for the potential dilutive effect of stock options and applicable convertible notes as of the balance sheet date. The effect of the assumed conversion of the $580.7 million Senior Convertible Notes, issued in October 2001, has been excluded from diluted earnings per share for the year ended February 1, 2002 because none of the conditions that would permit conversion had been satisfied during the period (see Note 7). Following is the reconciliation of EPS for 2001, 2000, and 1999. (In Thousands, Except Per Share Data) 2001 2000 1999 Basic Earnings per Share: Net Earnings $ 1,023,262 $ 809,871 $ 672,795 Weighted Average Shares Outstanding 772,098 765,596 762,480 Basic Earnings per Share $ 1.33 $ 1.06 $ 0.88 Diluted Earnings per Share: Net Earnings $ 1,023,262 $ 809,871 $ 672,795 Net Earnings Adjustment for Interest on Convertible Debt Net of Tax 9,315 - - Net Earnings, as Adjusted $ 1,032,577 $ 809,871 $ 672,795 Weighted Average Shares Outstanding 772,098 765,596 762,480 Dilutive Effect of Stock Options 6,559 3,354 5,228 Dilutive Effect of Convertible Debt 15,940 - - Weighted Average Shares, as Adjusted 794,597 768,950 767,708 Diluted Earnings per Share $ 1.30 $ 1.05 $ 0.88 NOTE 10 - Shareholders' Equity: Authorized shares of common stock were 2.8 billion at February 1, 2002 and February 2, 2001. The Company has 5 million authorized shares of preferred stock ($5 par), none of which have been issued. The Board of Directors may issue the preferred stock (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. The Company has a shareholder rights plan, which provides for a distribution of 0.5 preferred share purchase rights on each outstanding share of common stock. Purchase rights become distributable and exercisable only if a person or group acquires or commences a tender offer for 15% or more of Lowe's common stock. Once exercisable, each 0.5 purchase right will entitle shareholders (other than the acquiring person or group) to buy one unit of a series of preferred stock for $76.25; the price of the unit to the acquiring person or group in such event would be $152.50. Each unit is intended to be the economic equivalent of one share of common stock, and the plan was adopted to act as a deterrent to unsolicited offers to acquire control of the Company. The rights will expire in 2008, unless the Company redeems or exchanges them earlier. The Company has three stock incentive plans, referred to as the "2001," "1997," and "1994" Incentive Plans, under which incentive and non-qualified stock options may be granted to key employees. No awards may be granted after 2011 under the 2001 plan, 2007 under the 1997 plan, and 2004 under the 1994 plan. Stock options generally have terms ranging from 5 to 10 years, normally 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 February 1, 2002, there were 25,844,880, 1,515,486, and 1,393,750 shares available for grants under the 2001, 1997, and 1994 plans, respectively. Stock option information related to the 2001, 1997, and 1994 Incentive Plans is summarized as follows: 35 Key Employee Stock Option Plans Shares Weighted-Average (In Thousands) Exercise Price Per Share Outstanding at January 29, 1999 11,488 $13.35 Granted 2,288 $24.97 Canceled or Expired (1,240) $21.38 Exercised (1,470) $10.73 Outstanding at January 28, 2000 11,066 $16.18 Granted 7,370 $23.39 Canceled or Expired (1,672) $23.33 Exercised (1,256) $10.03 Outstanding at February 2, 2001 15,508 $19.43 Granted 10,866 $34.17 Canceled or Expired (1,611) $25.50 Exercised (5,622) $14.99 Outstanding at February 1, 2002 19,141 $28.77 Exercisable at February 1, 2002 6,707 $21.67 Exercisable at February 2, 2001 9,422 $16.94 Exercisable at January 28, 2000 6,540 $12.81 Outstanding Exercisable _______________________________ _______________________ Weighted- Weighted- Weighted- Range of Average Average Average Exercise Options Remaining Exercise Options Exercise Prices (In Thousands) Term Price (In Thousands) Price $ 5.18 - $ 7.52 117 3.2 $ 5.98 117 $ 5.98 8.70 - 12.90 524 2.9 11.65 524 11.65 13.19 - 19.73 292 5.1 15.28 292 15.28 20.71 - 30.66 14,050 5.3 25.13 5,774 23.21 $ 31.16 - $45.70 4,158 7.0 44.85 - - Totals 19,141 5.5 $ 28.77 6,707 $ 21.67 Restricted stock awards of 20,000, and 1,741,400 shares, with per share weighted-average fair values of $17.57, and $12.40, were granted to certain executives in 1998 and 1997, respectively. No restricted stock awards were granted in 2001, 2000, and 1999. These shares were nontransferable and subject to forfeiture for periods prescribed by the Company. During 2001, a total of 31,800 shares were forfeited and 312,600 shares vested. At February 1, 2002, all restricted stock awards were fully vested. Related expenses (charged to compensation expense) for 2001, 2000 and 1999 were $1.9, $7.3, and $12.5 million, respectively. In 1999, the Company's shareholders approved the Lowe's Companies, Inc. Directors' Stock Option Plan, which replaced the Directors' Stock Incentive Plan that expired on May 29, 1998. During the term of the Plan, each non-employee Director will be awarded 4,000 options on the date of the first board meeting after each annual meeting of the Company's shareholders (the award date). The maximum number of shares available for grant under the Plan is 500,000, subject to adjustment. No awards may be granted under the Plan after the award date in 2008. The options vest evenly over three years, expire after seven years and are assigned a price equal to the fair market value of the Company's common stock on the date of grant. During 2001, 40,000 shares were granted at a price of $35.91 per share; these shares remain outstanding at February 1, 2002. During 2000, 32,000 shares were granted at a price of $22.88 per share and remain outstanding at February 1, 2002. At February 1, 2002, a total of 10,672 options are exercisable from the 2000 grant. During 1999, 36,000 shares were granted under the Plan at a price of $25.84 per share, of which 28,000 remain outstanding at February 1, 2002. During 2001, 8,000 shares were canceled under the Plan. At February 1, 2002, a total of 18,669 shares are exercisable under the 1999 grant. During 2000, the Company established a qualified Employee Stock Purchase Plan that allows eligible employees to participate in the purchase of designated shares of the Company's common stock. Ten million shares were authorized for this plan with 7,436,586 remaining available at February 1, 2002. The purchase price of this stock is equal to 85% of the lower of the closing price at the beginning or the end of each semi-annual stock purchase period. The Company issued 1,688,966 and 874,448 shares of common stock pursuant to this plan during 2001 and 2000, respectively. No compensation expense has been recorded in the accompanying consolidated statement of earnings related to this Plan as the Plan qualifies as non-compensatory. The Company applies the intrinsic value method of accounting for its stock- based compensation plans. Accordingly, no compensation expense has been recognized for stock-based compensation where the option price approximated the fair market value of the stock on the date of grant, other than for restricted stock grants. Had compensation expense for 2001, 2000, and 1999 stock options granted been determined using the fair value method, the Company's net earnings and earnings per share (EPS) amounts would approximate the following pro forma amounts (in thousands, except per share data): 2001 2000 1999 As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma Net Earnings $1,023,262 $ 968,181 $ 809,871 $ 773,430 $ 672,795 $ 652,786 Basic EPS $ 1.33 $ 1.25 $ 1.06 $ 1.01 $ 0.88 $ 0.86 Diluted EPS $ 1.30 $ 1.22 $ 1.05 $ 1.01 $ 0.88 $ 0.85 36 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. 2001 2000 1999 Weighted average fair value per option $17.39 $11.57 $ 13.03 Assumptions used: Weighted average expected volatility 41.1% 37.7% 38.1% Weighted average expected dividend yield 0.23% 0.41% 0.52% Weighted average risk-free interest rate 4.58% 5.15% 6.24% Weighted average expected life, in years 7.0 7.0 7.0 The Company reports comprehensive income in its consolidated statement of shareholders' equity. Comprehensive income represents changes in shareholders' equity from non-owner sources. For the three years ended February 1, 2002, unrealized holding gains (losses) on available-for-sale securities were the only items of other comprehensive income for the Company. The following schedule summarizes the activity in other comprehensive income for the years ended February 1, 2002 and February 2, 2001: 2001 2000 _________________________ ___________________________ After Pre-Tax Tax Tax After Gain (Expense)/ Gain/ Pre-Tax Tax Tax (In Thousands) (Loss) Benefit (Loss) Gain Expense Gain Unrealized net holding gains/ losses arising during the year $353 $(124) $229 $1,319 $(445) $874 Less: Reclassification adjustment for gains/losses included in net earnings (16) 6 (10) 5 (2) 3 Unrealized net gains/losses on available-for-sale securities, net of reclassification adjustment $369 $(130) $239 $1,314 $(443) $871 NOTE 11 - Leases: The Company leases certain store facilities under agreements with original terms generally of 20 years. Certain lease agreements contain rent escalation clauses that are charged to rent expense on a straight-line basis. Some agreements also provide for contingent rental based on sales performance in excess of specified minimums. In fiscal years 2001, 2000, and 1999, contingent rentals have been nominal. The leases usually contain provisions for four renewal options of five years each. Certain equipment is also leased by the Company under agreements ranging from two to five years. These agreements typically contain renewal options providing for a renegotiation of the lease, at the Company's option, based on the fair market value at that time. The future minimum rental payments required under capital and operating leases having initial or remaining noncancelable lease terms in excess of one year are summarized as follows: (In Thousands) Operating Leases Capital Leases Fiscal Year Real Estate Equipment Real Estate Equipment Total 2002 $ 187,276 $ 429 $ 56,842 $ 2,503 $ 247,050 2003 192,328 41 56,795 2,303 251,467 2004 186,976 4 56,978 1,944 245,902 2005 181,349 - 56,993 182 238,524 2006 177,237 - 56,993 42 234,272 Later Years 2,065,727 - 559,958 - 2,625,685 Total Minimum Lease Payments $2,990,893 $474 $844,559 $6,974 $3,842,900 Total Minimum Capital Lease Payments $851,533 Less Amount Representing Interest 384,777 ______________________________________________________________________________ Present Value of Minimum Lease Payments 466,756 Less Current Maturities 18,938 _____ ____________ Present Value of Minimum Lease Payments, Less Current Maturities $ 447,818 Rental expenses under operating leases for real estate and equipment were $188.2, $161.9 and $144.0 million in 2001, 2000 and 1999, respectively. The Company has three operating lease agreements whereby lessors have committed to purchase land, fund construction costs and lease properties to the Company. The initial lease terms are five years with two five-year renewal options. One initial term expires in 2005 and the two remaining initial lease terms expire in 2006. The agreements contain guaranteed residual values up to a portion of the properties' original cost and purchase options at original cost for all properties under the agreements. The agreements contain certain restrictive covenants which include maintenance of specific financial ratios, among others. The Company has financed four regional distribution centers, two of which are under construction, and 14 retail stores through these lease agreements. Total commitments under these operating lease agreements as of February 1, 2002 and February 2, 2001 were $329.4 and $236.1 million, respectively. 37 Outstanding advances under those commitments were $201.1 and $167.7 million as Of February 1, 2002 and February 2, 2001. Payments related to these lease agreements have been included in the minimum lease payments table above. NOTE 12 - Employee Retirement Plans: The Company's contribution to its Employee Stock Ownership Plan (ESOP) is based on a minimum contribution that may be increased based on the attainment of certain performance measures which are subject to approval by the Board of Directors. The ESOP generally covers all Lowe's employees after completion of one year of employment and 1,000 hours of service during that year, with contributions vesting ratably over seven years. Employees participating in the Plan, who are age 50 or older with 10 or more years of service, are provided with a diversification option allowing them to transfer 50% of their shares in the Plan to the Company's 401(k) Plan. Participating employees, with at least 20 years of service, may also elect to receive a one-time withdrawal of 50% of their balance. Once a participant reaches age 59 1/2, with seven or more years of service, they may elect to have their entire account balance distributed to them. 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 usually made in the following year. ESOP expense for 2001, 2000 and 1999 was $119.2, $72.1 and $84.7 million, respectively. At February 1, 2002 the ESOP held approximately 6.2% of the outstanding common stock of the Company. Company shares held on the participants behalf by the Plan are voted by the participants. The Company's contributions to the 401(k) plan are based upon a matching formula applied to employee contributions. Employees are eligible to participate in the 401(k) plan after completing 90 days of continuous service. The Company's contributions to the 401(k) plan vest immediately in the participant's account. Company contributions to the 401(k) for 2001, 2000 and 1999 were $14.7, $13.6 and $11.5 million, respectively. Participants are allowed to choose from a group of mutual funds in order to designate how both employer and employee contributions are to be invested. The Company's common stock is also one of the investment options for contributions to the plan. Company shares held on the participant's behalf by the Plan are voted by the participants. NOTE 13 - Income Taxes: 2001 2000 1999 Statutory Rate Reconciliation Statutory Federal Income Tax Rate 35.0% 35.0% 35.0% State Income Taxes-Net of Federal Tax Benefit 3.0 2.7 2.8 Other, Net (1.0) (0.9) (1.1) Effective Tax Rate 37.0% 36.8% 36.7% (In Thousands) Components of Income Tax Provision Current Federal $490,569 $398,335 $333,257 State 68,762 49,950 43,626 Total Current 559,331 448,285 376,883 Deferred Federal 35,120 19,298 11,303 State 6,538 3,986 2,136 Total Deferred 41,658 23,284 13,439 Total Income Tax Provision $600,989 $471,569 $390,322 The tax effect of cumulative temporary differences that gave rise to the deferred tax assets and liabilities at February 1, 2002 and February 2, 2001 is as follows (in thousands): February 1, 2002 (In Thousands) Assets Liabilities Total Excess Property and Store Closing Costs $27,856 - $27,856 Insurance 62,885 - 62,885 Depreciation - $(330,888) (330,888) Vacation Accrual 27,160 - 27,160 Sales Returns 8,397 - 8,397 Other, Net 12,282 (19,885) (7,603) Total $138,580 $(350,773) $(212,193) February 2, 2001 (In Thousands) Assets Liabilities Total Excess Property and Store Closing Costs $20,879 - $20,879 Insurance 45,228 - 45,228 Depreciation - $(272,170) (272,170) Vacation Accrual 23,220 - 23,220 Sales Returns 6,467 - 6,467 Other, Net 19,492 (13,522) 5,970 Total $115,286 $(285,692) $(170,406) 38 NOTE 14 - 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 - Other Information: Net interest expense is composed of the following: (In Thousands) 2001 2000 1999 Long-Term Debt $161,228 $117,024 $ 86,675 Mortgage Interest 7,980 7,667 6,686 Capitalized Leases 40,441 42,041 42,552 Short-Term Debt 4,154 11,638 5,847 Amortization of Original Issue Discount and Loan Costs 18,165 2,631 801 Interest Income (24,653) (25,049) (38,373) Interest Capitalized (33,778) (35,127) (19,336) Net Interest Expense $173,537 $120,825 $ 84,852 _____________________________________________________________________________ Supplemental Disclosures of Cash Flow Information: (In Thousands) 2001 2000 1999 Cash Paid for Interest (Net of Amount Capitalized) $178,354 $132,457 $128,265 Cash Paid for Income Taxes $532,235 $428,385 $408,366 _____________________________________________________________________________ Noncash Investing and Financing Activities: Fixed Assets Acquired under Capital Leases $ 12,677 $ 1,259 $ 27,573 Termination of Capital Leases - 2,223 - Common Stock Issued to ESOP (Note 12) 63,449 - 59,512 Common Stock Issued to Executives and Directors, net of Unearned Compensation 1,912 7,734 12,488 Notes Received in Exchange for Sale of Real Estate $ 4,150 $ - $ - _____________________________________________________________________________ Sales by Product Category: 2001 2000 1999 (Dollars in Millions) Total Total Total Product Category Sales % Sales % Sales % Appliances $2,504 11% $1,922 10% $1,341 8% Lumber/Plywood 1,997 9 1,676 9 1,607 10 Outdoor Fashion 1,474 7 1,323 7 1,102 7 Millwork 1,443 6 1,197 6 1,021 6 Nursery 1,401 6 1,247 7 1,006 6 Cabinets/Furniture/Shelving 1,383 6 1,138 6 897 6 Fashion Electrical 1,340 6 1,135 6 959 6 Tools 1,282 6 1,124 6 951 6 Flooring 1,278 6 1,009 5 726 5 Fashion Plumbing 1,263 6 1,046 6 862 5 Hardware 1,251 6 1,070 6 946 6 Paint 1,244 6 996 5 858 5 Building Materials 1,239 6 1,148 6 1,080 7 Rough Plumbing & Electrical 1,147 5 993 5 854 5 Outdoor Power Equipment 818 4 768 4 676 4 Walls/Windows 533 2 452 2 361 2 Other 514 2 535 4 659 6 Totals $22,111 100% $18,779 100% $15,906 100% 40 Stock Performance (Unaudited) Lowe's Quarterly Stock Price Range and Cash Dividend Payment*
Fiscal 2001 Fiscal 2000 Fiscal 1999 High Low Dividend High Low Dividend High Low Dividend 1st Quarter $ 32.30 $ 24.79 $ 0.018 $ 33.63 $ 20.38 $ 0.018 $ 33.22 $ 25.66 $ 0.015 2nd Quarter 39.86 30.30 0.020 26.35 20.19 0.018 30.00 24.84 0.015 3rd Quarter 39.30 24.99 0.020 27.25 17.13 0.018 27.97 21.50 0.015 4th Quarter $ 48.88 $ 33.70 $ 0.020 $ 27.75 $ 18.88 $ 0.018 $ 30.00 $ 21.53 $ 0.018 * Adjusted for 2-for-1 stock split to shareholders of record on June 8, 2001, as applicable.
41 LOWE'S COMPANIES, INC. SELECTED FINANCIAL DATA (Unaudited) (In Thousands, Except Per Share Data)
2001 2000 1999 1998 1997 Selected Statement of Earnings Data: Net Sales $22,111,108 $18,778,559 $15,905,595 $13,330,540 $11,108,378 Gross Margin 6,367,841 5,290,768 4,380,582 3,573,895 2,953,046 Net Earnings 1,023,262 809,871 672,795 500,374 383,030 Basic Earnings Per Share 1.33 1.06 .88 .68 .52 Diluted Earnings Per Share 1.30 1.05 .88 .67 .52 Dividends Per Share $ .08 $ .07 $ .06 $ .06 $ .06 _______________________________________________________________________________________________________________________ Selected Balance Sheet Data: Total Assets $13,736,219 $11,358,167 $9,006,757 $7,086,882 $5,861,790 Long-Term Debt, Excluding Current Maturities $3,734,011 $2,697,669 $1,726,579 $1,364,278 $1,191,406 _______________________________________________________________________________________________________________________ Selected Quarterly Data First Second Third Fourth 2001 Net Sales $5,276,365 $6,126,726 $5,454,534 $5,253,483 Gross Margin 1,493,529 1,717,708 1,590,889 1,565,715 Net Earnings 225,280 329,083 250,497 218,402 Basic Earnings Per Share .29 .43 .32 .28 Diluted Earnings Per Share $ .29 $ .42 $ .32 $ .28 2000 Net Sales $4,467,114 $5,264,252 $4,504,141 $4,543,052 Gross Margin 1,248,116 1,452,027 1,299,372 1,291,253 Net Earnings 187,149 279,599 202,293 140,830 Basic Earnings Per Share .24 .37 .26 .18 Diluted Earnings Per Share $ .24 $ .36 $ .26 $ .18
EX-21 6 exhibit21e.txt LIST OF SUBSIDIARIES EXHIBIT 21 - SCHEDULE OF SUBSIDIARIES LOWE'S COMPANIES, INC. AND SUBSIDIARY COMPANIES NAME AND DOING BUSINESS AS: SATE OF INCORPORATION Lowe's Home Centers, Inc. North Carolina The Contractor Yard, Inc. North Carolina Sterling Advertising, Ltd. North Carolina LF, LLC Delaware Lowe's Home Centres (Canada), Inc. Canada L G Sourcing, Inc. North Carolina Lowe's HIW, Inc. Washington Anchorage Eagle, LLC Alaska Lowe's/Richmond Indiana, LLC Indiana Eagle Hardware and Garden Distribution Services, Inc. Washington Westinghouse Consumer Brands, LLC Delaware EX-23 7 exhibit23e.txt CONSENT OF DELOITTE & TOUCHE, LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-54497 on Form S-8, Registration Statement No. 33-54499 on Form S-8, Registration Statement No. 333-34631 on Form S-8, Registration Statement No. 333-75793 on Form S-8, Registration Statement No. 333-89471 on Form S-8, Registration Statement No. 333-36096 on Form S-8, Registration Statement No. 333-73408 on Form S-8, Registration Statement No. 333-33230 on Form S-3/A, Registration Statement No. 333-55252 on Form S-3/A and Registration Statement No. 333-60434 on Form S-3/A, of our report dated February 19, 2002, appearing in and incorporated by reference in this Annual Report on Form 10-K of Lowe's Companies, Inc. for the year ended February 1, 2002. /s/ Deloitte & Touche LLP Charlotte, North Carolina April 24, 2002 -----END PRIVACY-ENHANCED MESSAGE-----