-----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, Pyrlu/TKVxYfZSg+M+pSdI4Hm0vQaaqWAI41+xgg2Qt3bXkYpAgARAoXYJv/ku4n xTpla+H/mWpH6EtcDmeTOA== 0000060667-99-000016.txt : 19990910 0000060667-99-000016.hdr.sgml : 19990910 ACCESSION NUMBER: 0000060667-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990730 FILED AS OF DATE: 19990909 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-Q SEC ACT: SEC FILE NUMBER: 001-07898 FILM NUMBER: 99708728 BUSINESS ADDRESS: STREET 1: HIGHWAY 268 EAST CITY: NORTH WILKESBORO STATE: NC ZIP: 28659 BUSINESS PHONE: 3366584000 MAIL ADDRESS: STREET 1: PO BOX 1111 CITY: NORTH WILKESBORO STATE: NC ZIP: 28659 10-Q 1 -1- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended July 30, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 1-7898 LOWE'S COMPANIES, INC. (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0578072 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1605 CURTIS BRIDGE ROAD, WILKESBORO, N.C. 28697 (Address of principal executive offices) (Zip Code) (336) 658-4000 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class ____ Outstanding at August 27, 1999 Common Stock, $.50 par value 382,137,544 16 TOTAL PAGES -2- LOWE'S COMPANIES, INC. - INDEX - Page No. PART I - Financial Information: Consolidated Balance Sheets - July 30, 1999, July 31, 1998 and January 29, 1999 3 Consolidated Statements of Current and Retained Earnings - quarter and six months ended July 30, 1999 and July 31, 1998 4 Consolidated Statements of Cash Flows - six months ended July 30, 1999 and July 31, 1998 5 Notes to Consolidated Financial Statements. 6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-12 Independent Accountants' Report 13 PART II - Other Information 14 Item 4 - Submission of Matters to a Vote of Security Holders Item 6 (a) - Exhibits Item 6 (b) - Reports on Form 8-K EXHIBIT INDEX 16 -3- Lowe's Companies, Inc. Consolidated Balance Sheets In Thousands
July 30, July 31, January 29, 1999 1998 1999 Assets Current assets: Cash and cash equivalents $973,684 $603,330 $228,874 Short-term investments 51,366 43,680 20,343 Accounts receivable - net 181,651 159,613 143,928 Merchandise inventory 2,589,854 2,182,043 2,346,092 Deferred income taxes 56,245 43,566 56,124 Other assets 77,051 94,907 49,021 Total current assets 3,929,851 3,127,139 2,844,382 Property, less accumulated depreciation 4,535,999 3,602,045 4,085,798 Long-term investments 33,202 36,775 28,716 Other assets 119,402 80,080 105,508 Total assets $8,618,454 $6,846,039 $7,064,404 Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings $92,475 $93,975 $117,075 Current maturities of long-term debt 118,217 48,020 107,893 Accounts payable 1,472,209 1,287,855 1,220,543 Employee retirement plans 78,350 59,361 85,466 Accrued salaries and wages 119,972 87,944 123,545 Other current liabilities 464,610 369,801 269,734 Total current liabilities 2,345,833 1,946,956 1,924,256 Long-term debt, excluding current maturities 1,747,142 1,495,495 1,364,278 Deferred income taxes 174,028 139,366 175,372 Other long-term liabilities 3,603 3,516 3,209 Total liabilities 4,270,606 3,585,333 3,467,115 Shareholders' equity Preferred stock - $5 par value, none issued - - - Common stock - $.50 par value; Issued and Outstanding July 30, 1999 381,918 July 31, 1998 370,932 January 29, 1999 374,388 190,959 185,466 187,194 Capital in excess of par 1,731,544 1,209,739 1,325,817 Retained earnings 2,446,622 1,898,022 2,114,248 Unearned compensation- restricted stock awards (21,204) (32,679) (30,387) Accumulated other comprehensive income (loss) (73) 158 417 Total shareholders' equity 4,347,848 3,260,706 3,597,289 Total liabilities and shareholders' equity $8,618,454 $6,846,039 $7,064,404 See accompanying notes to consolidated financial statements.
-4- Lowe's Companies, Inc. Consolidated Statements of Current and Retained Earnings In Thousands, Except Per Share Data
Quarter Ended Six Months Ended July 30, 1999 July 31, 1998 July 30, 1999 July 31, 1998 Current Earnings Amount Percent Amount Percent Amount Percent Amount Percent Net sales $4,435,219 100.00 $3,733,642 100.00 $8,207,138 100.00 $6,883,421 100.00 Cost of sales 3,247,933 73.23 2,743,765 73.49 6,012,762 73.26 5,063,041 73.55 Gross margin 1,187,286 26.77 989,877 26.51 2,194,376 26.74 1,820,380 26.45 Expenses: Selling, general and administrative 704,821 15.89 602,055 16.13 1,369,172 16.68 1,171,610 17.02 Store opening costs 15,465 0.35 14,952 0.40 33,675 0.41 27,347 0.40 Depreciation 81,723 1.84 70,455 1.89 159,643 1.95 139,303 2.02 Interest 22,096 0.50 18,810 0.50 45,403 0.55 40,449 0.59 Nonrecurring merger costs - - - - 24,378 0.30 - - Total expenses 824,105 18.58 706,272 18.92 1,632,271 19.89 1,378,709 20.03 Pre-tax earnings 363,181 8.19 283,605 7.59 562,105 6.85 441,671 6.42 Income tax provision 132,964 3.00 102,856 2.75 206,930 2.52 160,195 2.33 Net earnings $230,217 5.19 $180,749 4.84 $355,175 4.33 $281,476 4.09 Shares outstanding - Basic 381,635 370,612 380,220 370,125 Basic earnings per share $0.60 $0.49 $0.93 $0.76 Shares outstanding - Diluted 384,311 375,667 383,104 375,004 Diluted earnings per share $0.60 $0.48 $0.93 $0.76 Retained Earnings Balance at beginning of period $2,227,816 $1,727,783 $2,114,248 $1,636,666 Net earnings 230,217 180,749 355,175 281,476 Cash dividends (11,411) (10,510) (22,801) (20,120) Balance at end of period $2,446,622 $1,898,022 $2,446,622 $1,898,022 See accompanying notes to consolidated financial statements.
-5- Lowe's Companies, Inc. Consolidated Statements of Cash Flows In Thousands
For the Six Months Ended July 30, July 31, Periods Ended On 1999 1998 Cash Flows From Operating Activities: Net Earnings $355,175 $281,476 Adjustments to Reconcile Net Earnings to Net Cash Provided By Operating Activities: Depreciation 159,643 139,303 Amortization of Original Issue Discount 307 221 Decrease in Deferred Income Taxes (1,329) (6,494) Loss on Disposition/Writedown of Fixed and Other Assets 37,994 14,722 Changes in Operating Assets and Liabilities: Accounts Receivable - Net (37,723) (41,205) Merchandise Inventory (243,762) (264,618) Other Operating Assets (25,759) (56,648) Accounts Payable 251,666 251,973 Employee Retirement Plans 40,455 33,989 Other Operating Liabilities 200,241 146,895 Net Cash Provided by Operating Activities 736,908 499,614 Cash Flows from Investing Activities: (Increase) Decrease in Investment Assets: Short-Term Investments (29,926) (16,059) Purchases of Long-Term Investments (7,713) (13,632) Proceeds from Sale/Maturity of Long-Term Investments 1,509 522 Increase in Other Long-Term Assets (32,733) (7,768) Fixed Assets Acquired (617,395) (422,232) Proceeds from the Sale of Fixed and Other Long-Term Assets 21,377 12,188 Net Cash Used in Investing Activities (664,881) (446,981) Cash Flows from Financing Activities: Net Decrease in Short-Term Borrowings (24,600) (4,129) Long-Term Debt Borrowings 394,587 328,160 Repayment of Long-Term Debt (36,951) (10,917) Proceeds from Stock Offering 348,299 - Proceeds from Stock Options Exercised 14,249 8,587 Cash Dividend Payments (22,801) (29,707) Net Cash Provided by Financing Activities 672,783 291,994 Net Increase in Cash and Cash Equivalents 744,810 344,627 Cash and Cash Equivalents, Beginning of Period 228,874 258,703 Cash and Cash Equivalents, End of Period $973,684 $603,330 See accompanying notes to consolidated financial statements.
-6- Lowe's Companies, Inc. Notes to Consolidated Financial Statements Note 1: The accompanying Consolidated Financial Statements (unaudited) have been reviewed by independent certified public accountants, and in the opinion of management, they contain all adjustments necessary to present fairly the financial position as of July 30, 1999, and the results of operations for the quarters and six months ended July 30, 1999 and July 31, 1998, and the cash flows for the six months ended July 30, 1999 and July 31, 1998. These interim financial statements should be read in conjunction with the financial statements and notes thereto included in the Lowe's Companies, Inc. (the Company) Annual Report on Form 10-K for the fiscal year ended January 29, 1999. The financial results for the interim periods may not be indicative of the financial results for the entire fiscal year. Note 2: The Company completed its merger with Eagle Hardware & Garden, Inc. (Eagle) on April 2, 1999. The transaction, which is valued at approximately $1.3 billion, was structured as a tax-free exchange of the Company's common stock for Eagle's common stock, and was accounted for as a pooling of interests. The financial statements and notes presented provide information on a combined basis for the quarters and six months periods ended July 30, 1999, July 31, 1998 and as of January 29, 1999. Note 3: Diluted earnings per share are calculated on the weighted average shares of common stock as adjusted for the dilutive effect of stock options at the balance sheet date. The weighted average number of shares, as adjusted for dilution, were 384,311,000 and 375,667,000 for the quarters ended July 30, 1999 and July 31, 1998, respectively,and 383,104,000 and 375,004,000 for the six months ended July 30, 1999 and July 31, 1998, respectively. Note 4: Net interest expense is composed of the following (in thousands):
Quarter ended Six months ended July 30, July 31, July 30, July 31, 1999 1998 1999 1998 Long-term debt $ 23,930 $ 19,364 $ 46,465 $ 37,850 Capitalized leases 10,825 9,736 21,163 19,759 Short-term debt 1,208 1,387 3,076 2,816 Amortization of loan cost 259 189 495 394 Short-term interest income (9,821) (7,903) (17,775) (13,687) Interest capitalized on construction in progress (4,305) (3,963) (8,021) (6,683) Net interest expense $ 22,096 $ 18,810 $ 45,403 $ 40,449
Note 5: Inventory is stated at the lower of cost or market using the last- in, first-out inventory accounting method, except for the inventory held by Eagle. Inventory held by Eagle of $271.0 and $213.8 million at July 30, 1999 and July 31, 1998, respectively, is stated at the lower of cost or market using the weighted average method of inventory accounting. The Company's LIFO reserve was $38.6 million at July 30, 1999 and January 29, 1999 and $64.6 million at July 31, 1998. -7- Note 6: Property is shown net of accumulated depreciation of $1.1 billion at July 30, 1999, $.9 billion at July 31, 1998 and $1.0 billion at January 29, 1999. Note 7: Supplemental disclosures of cash flow information (in thousands):
Six months ended July 30, 1999 July 31, 1998 Cash paid for interest $ 60,448 $ 50,898 (net of capitalized) Cash paid for income taxes 150,552 128,266 Non-cash investing and financing activities: Common stock issued to ESOP 47,571 44,597 Fixed assets acquired under capital lease 35,243 12,597
Note 8: In January 1999, the Board of Directors authorized the funding of the Fiscal 1998 ESOP contribution primarily with the issuance of new shares of the Company's common stock. During the first half of Fiscal 1999, the Company issued 823,190 shares, with a market value of $47.6 million. Note 9: In February 1999, the Company issued $400 million of 6.5% Debentures due March 15, 2029 in a private offering. The debentures were registered in July 1999 with the filing of Form S-4 with the Securities and Exchange Commission. The debentures were issued at an original price of $986.47 per $1,000 principal amount, net of the original issue discount and underwriters' discount. The debentures may not be redeemed prior to maturity. In March 1999, the Company issued 6,206,895 shares of common stock in a public offering. The net proceeds from the offering were $348.3 million and were issued under a shelf registration statement filed with the Securities and Exchange Commission in December 1997. Note 10: Total comprehensive income, comprised of net earnings and unrealized holding gains (losses) on available-for-sale securities, was $229.9 and $180.9 million for the quarters ended July 30, 1999 and July 31, 1998, respectively, compared to reported net earnings of $230.2 and $180.7 million for the second quarter of 1999 and 1998. Total comprehensive income was $354.7 and $281.4 million for the six months ended July 30, 1999 and July 31, 1998, respectively, compared to reported net earnings of $355.2 and $281.5 million for the first six months of 1999 and 1998. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion summarizes the significant factors affecting the Company's consolidated operating results and liquidity and capital resources during the quarter and six months ended July 30, 1999. This discussion should be read in conjunction with the financial statements, and financial statement footnotes included in the Company's most recent Form 10-K. The Company completed its merger with Eagle Hardware & Garden, Inc. (Eagle) on April 2, 1999. The transaction, which is valued at approximately $1.3 billion, was structured as a tax-free exchange of the Company's common stock for Eagle's common stock, and was accounted for as a pooling of interests. As a result, all current and historical financial information is presented on a combined basis. OPERATIONS For the second quarter of fiscal 1999, sales increased 19% to $4.4 billion, comparable store sales increased 5.6% and net earnings rose 27% to $230.2 million compared to last year's second quarter results. Diluted earnings per share were $.60 compared to $.48 for the comparable quarter of last year. For the six months ended July 30, 1999, sales increased 19% to $8.2 billion, comparable store sales increased 6.1% and net earnings increased 26% to $355.2 million compared to the first six months of 1998. Diluted earnings per share were $.93 compared to $.76 for the first six months of last year. Pretax earnings for the first six months of 1999 were reduced by a nonrecurring charge of $24.4 million relating to the Company's merger with Eagle. Excluding the one-time charge, diluted earnings per share would have been $.97 for the first six months of 1999. The sales increase in the second quarter was attributable to 8.1 million square feet of retail selling space relating to new and relocated stores since last year's second quarter and the 5.6% comparable store sales gain. Sales in the Company's core businesses performed well during the second quarter. The Company experienced its strongest sales increases in appliances, kitchen cabinets, nursery and garden products, hardware and home decor categories. Gross margin was 26.77% of sales for the quarter ended July 30, 1999 compared to 26.51% for last year's comparable quarter. Gross margin for the six months ended July 30, 1999 was 26.74% versus 26.45% in the first six months of 1998. The increase in margin rate for the second quarter and first six months of 1999 results primarily from favorable changes in product mix, ongoing store pricing disciplines, leveraging of distribution facilities and lower product costs. There was a LIFO credit of $3.0 million for the first six months of 1998 compared to no LIFO charge or credit in the first six months of 1999. Selling, general and administrative expenses (SG&A) were 15.89% of sales versus 16.13% in last year's second quarter. SG&A increased by 17% compared to the 19% increase in sales for the quarter. SG&A was 16.68% of sales for the six months ended July 30, 1999 compared to 17.02% for the first six months of 1998. SG&A increased by 17% compared to the 19% increase in sales for the first six -9- months of 1999. Lower net advertising expense, increased credit card program income and controls relating to other expenses contributed to the positive leverage in SG&A for the second quarter and the first six months of 1999. Store opening costs were $15.5 million for the quarter ended July 30, 1999 compared to $15.0 million last year, representing costs associated with the opening of 21 stores during the current year's second quarter (8 new and 13 relocated). This compares to 15 stores for the comparable period last year (8 new and 7 relocated). Charges in this quarter for future and prior openings were $4.3 million compared to $5.4 million in last year's second quarter. Charges totaling $2.4 and $3.6 million related to stores opening in the second quarter of 1999 and 1998, respectively, were expensed prior to the respective quarter. Store opening costs for the six months ended July 30 ,1999 were $33.7 million compared to $27.3 million last year. These costs were associated with the opening of 34 stores during the first six months of 1999 (16 new and 18 relocated) compared to 25 stores (15 new and 10 relocated) opened during the first six months of last year. For the six months ended, store opening costs also included a $2.2 million charge relating to Eagle's adoption of the American Institute of Certified Public Accountants' Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities". These expenses were previously capitalized and written off after stores were opened. Currently, these costs are expensed as incurred. The Company's 1999 expansion plans are discussed under "Liquidity and Capital Resources" below. Depreciation was $81.7 million for the quarter ended July 30, 1999 and $159.6 million for the six months then ended. This represents an increase of 16.0% and 14.6% over the respective comparable periods last year. The increase is due primarily to additions of buildings, fixtures, displays and computer equipment relating to the Company's expansion program. Interest expense increased from $18.8 and $40.4 million to $22.1 and $45.4 million for the quarter and six months ended July 30, 1999, respectively. Interest has increased primarily due to interest expense on debentures issued since last year's second quarter. In the first quarter of 1999, the Company recorded nonrecurring costs of $24.4 million relating to the merger with Eagle which consisted of $15.7 million relating to the writeoff of nonusable Eagle properties, $1.5 million for severance obligations to former Eagle executives and $7.2 million in direct merger costs such as accounting, legal, investment banker and other miscellaneous fees. The Company's effective income tax rate was 36.61% for the quarter ended July 30, 1999 and 36.27% for last year's second quarter. The effective rate was 36.81% compared to 36.27% for the six months ended July 30, 1999 and July 31, 1998, respectively. The higher rate in 1999 is primarily related to the expansion into states with higher income tax rates and the impact of non- deductible merger expenses. LIQUIDITY AND CAPITAL RESOURCES Primary sources of liquidity are cash flows from operating activities and certain financing activities. Net cash provided by operating activities was $737 million for the six months ended July 30, 1999 compared to $500 million for the first six months of 1998. The $237 million increase in the current year resulted primarily from increased cash earnings, an increase in other liabilities due to payment -10- timing differences and a smaller increase in merchandise inventory as compared to the prior period. The Company's working capital was $1.6 billion at July 30, 1999 compared to $1.2 billion at July 31, 1998 and $920 million at January 29, 1999. The primary component of net cash used in investing activities continues to be new store facilities in connection with the Company's expansion plan. Cash acquisitions of fixed assets were $617 million and $422 million for the six months ended July 30, 1999 and July 31, 1998, respectively. At July 30, 1999, the Company had 533 stores in 37 states and 50.6 million square feet of retail selling space, a 19% increase over the selling space as of July 31, 1998. Cash flows provided by financing activities were $673 million for the six months ended July 30, 1999 compared to $292 million for the six months ended July 31, 1998. The major cash components of financing activities in the first six months of 1999 included the issuance of $400 million principal of 6.5% debentures and $348.3 million in net proceeds from a common stock offering. Property has increased as a result of the Company's plan to continue expansion of retail sales floor square footage by expanding into new markets and relocating from older, smaller stores to larger stores. The Company's 1999 capital budget is approximately $1.7 billion, inclusive of approximately $214 million in operating or capital leases. More than 80% of this planned commitment is for store expansion. Expansion plans for 1999 consist of approximately 85 to 90 stores (including the relocation of 30 to 35 older, smaller format stores). This planned expansion is expected to increase sales floor square footage by approximately 18%. Approximately 15% of the 1999 projects will be leased and 85% will be owned. Expansion in the first six months of fiscal 1999 included 16 new stores and 18 relocations representing 3.1 million square feet of new incremental retail space. The Company believes that funds from operations, debt issuances, leases and existing credit agreements will be adequate to finance the 1999 expansion plan and other operating needs. As discussed in the annual report for the year ending January 29, 1999, the Company's major market risk exposure is the potential loss arising from changing interest rates and its impact on long-term investments and long-term debt. The Company's policy is to manage interest rate risks by maintaining a combination of fixed and variable rate financial instruments. The risks associated with long-term investments at July 30, 1999 have not changed materially since January 29, 1999. Long-term debt has increased primarily due to the issuance of $400 million principal amount of 6.5% Debentures due March 15, 2029. YEAR 2000 The Year 2000 problem arose because many existing computer programs and embedded computer chips use only the last two digits to refer to a year. If not addressed, computer programs that are date sensitive may not have the ability to properly recognize dates in year 2000 and beyond. The result could be a disruption of operations and the processing of transactions. In 1997 and 1998, the Company completed an analysis of the impact and costs relating to the Year 2000 problem and developed an implementation plan to address information technology (IT), non-information technology (non-IT) and third party readiness issues. -11- In preparing IT systems for the Year 2000, the Company has utilized both internal and external resources. Contracted programming costs to convert the Company's IT systems during 1997, 1998 and 1999 are estimated to total approximately $5 million and are being expensed as incurred, the majority of which had been incurred through the first quarter. Currently, over 99% of the programs have been remediated. In addition, approximately $19 million of computer hardware has been purchased to replace non-compliant computer hardware. The cost of new hardware is being capitalized and depreciated over useful lives ranging from 3 to 5 years. Cash flow from operations is the Company's source of funding all Year 2000 costs. The incremental cost to convert systems has been mitigated by substantial investments in new computer systems over the past six years. During this period, new computer systems have been developed or purchased including, but not limited to, these applications: Distribution, Electronic Data Interchange, Payroll and Human Resources, General Ledger, Accounts Payable, Forecasting and Replenishment, and Supply Services. All of these new systems are Year 2000 compliant. The Company's conversion of internally developed legacy systems was completed by the end of fiscal 1998. The first stage of certification testing was completed by September, 1999 with stage two planned to be completed in mid December, 1999. With respect to non-IT related risks, each functional area of the Company is responsible for identifying these issues. Within each business function, objectives are being prioritized and evaluated for risk of Year 2000 problems. The assessment phase was completed in April 1999. Based on those assessments, contingency plans for high priority and critical business functions have been developed and have been reviewed by the Company's senior management. The contingency plans approved by senior management will be implemented and revised during the remainder of calendar year 1999. Examples of potential non-IT risks of Year 2000 problems would be power outages and failures of communication systems, bar code readers and security devices. Over half of the Company's stores have generators in place that would mitigate most problems associated with a temporary power outage, while the remaining stores have the capability to continue operations on a curtailed basis until power is restored. In regards to third party readiness, the Company mailed Year 2000 questionnaires to all identified third parties (merchandise vendors and other entities with which the Company conducts business) in order to assess whether they are Year 2000 compliant or have adequately addressed their system conversion requirements. Of the approximate six thousand questionnaires mailed, 44% of the recipients have currently responded. A majority of the non-respondents have been contacted by phone and our questionnaire has been faxed to them requesting signed returns within 24 hours. The Company is currently assessing the adequacy of these responses. The Company cannot predict how many of the responses received may prove later to be inaccurate or overly optimistic. To address this uncertainty, the Company has developed contingency plans to address unanticipated interruptions or down time in both the Company's and third parties' systems and services. The Company is continuing to closely monitor adherence to the remainder of its Year 2000 implementation plan and is currently satisfied that it will be completed in the third quarter of 1999. For the remainder of the project, the Company's efforts will be devoted to four primary areas: (1) certification testing of IT systems to ensure Year 2000 compliance, (2) contingency plan implementation and revisions for business areas as well as IT systems, (3) continued follow-up to questionnaires sent to third parties, and (4) updating some of the purchased software packages with Year 2000 compliant upgrades. If the Company encounters unforeseen complications or issues not previously addressed in the comprehensive plan, additional resources from internal and external sources will be committed to -12- complete the project by the planned completion time of the third quarter of 1999. Since the use of these additional resources is considered unlikely, no estimates as to their costs have been made at this time. Following completion of the merger on April 2, 1999, the Company began a review of the Eagle Hardware and Garden subsidiary preparedness for the Year 2000. The findings indicated that the Eagle computer systems are substantially Year 2000 ready. For the Eagle operations, the remainder of this year will be focused on developing contingency plans and upgrading point- of-sale software. The Company believes that its contingency plan should mitigate any adverse effect on its business from the Year 2000 problem. However, if: (1) the implementation of the plan is not completed on time, (2) the Company has failed to identify and fix material non-complying equipment or software, or (3) third parties are unable to fulfill significant commitments to the Company as a result of their failure to effectively address their Year 2000 problems, the Company's ability to carry out its business could be adversely affected. For example, the Company believes that its most likely worst case scenarios would involve the inability of the Company's IT and non-IT systems to process transactions in the stores or on a regional or company-wide basis. If that were to occur, the Company could be forced to process these transactions manually. The volume of business the Company could transact, and its sales and income, would be reduced until it was able to develop alternatives to defective systems or non-complying vendors. These reductions could occur at individual stores or in clusters of stores sharing defective systems or non- complying vendors. The effect of any failures on the Company's results of operations would depend, of course, upon the extent of any non-compliance and its impact on critical business systems and sources of supply, but could be significant. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) was issued in June 1998. SFAS 133 is effective for the Company in the year beginning January 26, 2001. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Management is currently evaluating the impact of the adoption of SFAS 133 and its effect on the Company's financial statements. FORWARD-LOOKING STATEMENTS This Securities and Exchange Commission Form 10-Q may include "forward- looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ from expectations include, but are not limited to, general economic trends, availability and development of real estate for expansion, commodity markets, the nature of competition, vendor supply, and weather conditions, all which are described in detail in the Company's 1998 Annual Report. -13- INDEPENDENT ACCOUNTANTS' REPORT The Board of Directors Lowe's Companies, Inc.: We have reviewed the accompanying consolidated balance sheet of Lowe's Companies, Inc. and subsidiary companies (the "Company") as of July 30, 1999, and the related consolidated statements of current and retained earnings, and cash flows for the three-month periods ended July 30, 1999 and July 31, 1998. These financial statements are the responsibility of the Company's management. The accompanying consolidated financial statements give retroactive effect to the 1999 merger of the Company and Eagle Hardware & Garden, Inc. which has been accounted for as a pooling of interests as described in note 2 to the consolidated financial statements. We were furnished with the reports of other accountants on their review of the interim financial information of Eagle Hardware and Garden, Inc., whose total revenues constituted 8% of consolidated total revenues for both the three-month and six-month periods ended July 31, 1998. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Lowe's Companies, Inc. and subsidiary companies as of January 29, 1999, prior to restatement for the 1999 pooling of interests (not presented herein); and in our report dated February 19, 1999, we expressed an unqualified opinion on those consolidated financial statements. The financial statements of Eagle Hardware & Garden, Inc. for the year ended January 29, 1999, were audited by other auditors whose report, dated March 10, 1999, expressed an unqualified opinion on those financial statements (not presented herein). We also audited the adjustments described in Note 2 to the consolidated statements that were applied to restate the January 29, 1999 consolidated balance sheet of the Company (not presented herein). In our opinion, such statements are appropriate and have been properly applied and the information set forth in the accompanying consolidated balance sheet as of January 29, 1999 is fairly stated, in all material respects, in relation to the restated consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP Charlotte, North Carolina August 11, 1999 -14- Part II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders. (a) - The annual meeting of shareholders was held May 28, 1999. (b) - Directors elected at the meeting: James F. Halpin, Richard K. Lochridge, and Claudine B. Malone Incumbent Directors whose terms expire in subsequent years are: Carol A. Farmer, Robert L. Strickland, Peter C. Browning, Leonard L. Berry, Paul Fulton, Robert G Schwartz and Robert L. Tillman (c) - The matters voted upon at the meeting and the results of the voting were as follows: (1) Election of Directors: FOR WITHHELD James F. Halpin 285,735,042 35,841,835 Richard K. Lochridge 285,757,119 35,819,758 Claudine B. Malone 285,693,327 35,883,550 (2) Proposal to approve the Lowe's Companies, Inc. Directors' Stock Option Plan FOR AGAINST ABSTAIN 266,432,259 53,525,960 1,598,756 Item 6 (a) - Exhibits (3.2) Bylaws, as Amended and Restated May 28, 1999 Refer to the Exhibit Index on page 16 Item 6 (b) - Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended July 30, 1999. -15- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LOWE'S COMPANIES, INC. September 8, 1999 /s/ Kenneth W. Black, Jr. Date ------------------ ---------------------------------------- Kenneth W. Black, Jr. Vice President and Corporate Controller -16- EXHIBIT INDEX Page No. Exhibit 3.2 - Bylaws, as Amended and Restated May 28, 1999 17 - 33 EX-27 2
5 1000 6-MOS JAN-28-2000 JUL-30-1999 973,684 51,366 181,651 0 2,589,854 3,929,851 4,535,999 0 8,618,454 2,345,833 0 0 0 190,959 4,156,889 8,618,454 8,207,138 8,207,138 6,012,762 6,012,762 1,586,868 0 45,403 562,105 206,930 355,175 0 0 0 355,175 0.93 0.93
EX-3.2 3 -17- Exhibit 3.2 BYLAWS OF LOWE'S COMPANIES, INC. As Amended and Restated May 28, 1999 INDEX ARTICLE I. OFFICES 1 ARTICLE II. SHAREHOLDERS 1 SECTION 1. ANNUAL MEETING 1 SECTION 2. SPECIAL MEETINGS 1 SECTION 3. PLACE OF MEETING 1 SECTION 4. NOTICE OF MEETING 2 SECTION 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE 2 SECTION 6. VOTING LISTS 2 SECTION 7. QUORUM 3 SECTION 8. PROXIES; ELECTRONIC AUTHORIZATION 3 SECTION 9. VOTING OF SHARES 4 SECTION 10. CONDUCT OF MEETINGS 4 ARTICLE III. BOARD OF DIRECTORS 5 SECTION 1. GENERAL POWERS 5 SECTION 2. NUMBER, TENURE AND QUALIFICATIONS 5 SECTION 3. FOUNDING DIRECTOR 5 SECTION 4. QUARTERLY MEETINGS 5 SECTION 5. SPECIAL MEETINGS 6 SECTION 6. NOTICE 6 SECTION 7. QUORUM 6 SECTION 8. MANNER OF ACTING 6 SECTION 9. VACANCIES 6 SECTION 10. COMPENSATION 6 SECTION 11. PRESUMPTION OF ASSENT 6 SECTION 12. ACTION WITHOUT MEETING 7 SECTION 13. INFORMAL ACTION BY DIRECTORS 7 SECTION 14. COMMITTEES GENERALLY 7 SECTION 15. EXECUTIVE COMMITTEE 7 SECTION 16. AUDIT COMMITTEE 8 SECTION 17. COMPENSATION COMMITTEE 8 SECTION 18. GOVERNANCE COMMITTEE 8 -18- SECTION 19. GOVERNMENT/LEGAL AFFAIRS COMMITTEE 8 SECTION 20. SALARY ADMINISTRATION; DIRECTORS COMPENSATION 9 ARTICLE IV. INDEMNIFICATION 9 SECTION 1. INDEMNIFICATION 9 SECTION 2. LIMITATION ON INDEMNIFICATION 9 SECTION 3. BOARD DETERMINATION 9 SECTION 4. RELIANCE 9 SECTION 5. AGENTS AND EMPLOYEES 10 SECTION 6. EXPENSES 10 SECTION 7. INSURANCE 10 ARTICLE V. OFFICERS 10 SECTION 1. TITLES 10 SECTION 2. ELECTION AND TERM OF OFFICE 10 SECTION 3. REMOVAL 10 SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS 11 SECTION 5. VICE CHAIRMEN OF THE BOARD OF DIRECTORS 11 SECTION 6. PRESIDENT 11 SECTION 7. VICE PRESIDENTS 11 SECTION 8. SECRETARY 11 SECTION 9. TREASURER 11 SECTION 10. CONTROLLER 11 ARTICLE VI. DEPARTMENTAL DESIGNATIONS 11 SECTION 1. DEPARTMENTAL DESIGNATIONS 11 ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER 12 SECTION 1. CERTIFICATES FOR SHARES; NON-CERTIFICATED SHARES 12 SECTION 2. TRANSFER OF SHARES 12 SECTION 3. LOST CERTIFICATES 13 ARTICLE VIII. FISCAL YEAR 13 ARTICLE IX. DIVIDENDS 13 ARTICLE X. SEAL 13 -19- ARTICLE XI. WAIVER OF NOTICE 14 ARTICLE XII. AMENDMENTS 14 -20- BYLAWS OF LOWE'S COMPANIES, INC. As Amended and Restated May 28, 1999 ARTICLE I. OFFICES The principal office of the corporation in the State of North Carolina shall be located in the County of Wilkes. The registered office of the corporation, required by law to be continuously maintained in the State of North Carolina, may be, but need not be, identical with the principal office and shall be maintained at that location identified as the address of the business office of the registered agent with the North Carolina Secretary of State. The corporation may have such other offices either within or without the State of North Carolina, as the Board of Directors may designate or the business of the corporation may require from time to time. ARTICLE II. SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders shall be held on the last Friday in the month of May in each year, at an hour to be designated by the Chairman of the Board, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. The meeting shall be held on the following business day at the same time in the event the last Friday in May shall be a legal holiday. If the annual meeting shall not be held on the day designated by this Section 1, a substitute annual meeting shall be called in accordance with the provisions of Section 2 of this Article II. A meeting so called shall be designated and treated for all purposes as the annual meeting. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes may be called by the Chairman of the Board or by a majority of the Board of Directors. SECTION 3. PLACE OF MEETING. The Board of Directors may designate any place, either within or without the State of North Carolina, as the place of meeting for any annual meeting or for any special meeting called by the Board of Directors. In the event the directors do not designate the place of meeting for either an annual or special meeting of the shareholders, the Chairman of the Board may designate the place of meeting. If the -21- Chairman of the Board does not designate the place of meeting, the meeting shall be held at the offices of the corporation in North Wilkesboro, North Carolina. SECTION 4. NOTICE OF MEETING. Written notice stating the place, day, and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than 10 nor more than 60 days before the day of the meeting, by mail, by or at the direction of the Secretary, or the officer or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. Such notice, when mailed, shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. When a meeting is adjourned it shall not be necessary to give any notice of the adjourned meeting other than by announcement at the meeting at which the adjournment is taken unless a new record date for the adjourned meeting is or must be fixed, in which event notice shall be given to shareholders as of the new record date. SECTION 5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at the meeting or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, 60 days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least 10 days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 70 days and, in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or of shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section 5, such determination shall apply to any adjournment thereof if the meeting is adjourned to a date not more than 120 days after the date fixed for the original meeting. SECTION 6. VOTING LISTS. The officer or agent having charge of the stock transfer books for shares of the corporation shall make before each meeting of shareholders a complete list of the shareholders entitled to vote at such meeting arranged in alphabetical order and by voting group (and within each voting group by class or series of shares), with the address of and the number of shares held by each. For a period beginning -22- two business days after notice of the meeting is given and continuing through the meeting, this list shall be available at the corporation's principal office for inspection by any shareholder at any time during usual business hours. The list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the te any meeting of shareholders. SECTION 7. QUORUM. Shares entitled to vote as a separate voting group may take action on a matter at a meeting if a quorum of that voting group exists with respect to that matter. In the absence of a quorum at the opening of any meeting of shareholders, the meeting may be adjourned from time to time by the vote of the majority of the votes cast on the motion to adjourn. A majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter. Once a share isrepresented for any purpose at a meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of the meeting unless a new record date is or must be set for the adjourned meeting. If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation, a Bylaw adopted by the shareholders, or the North Carolina Business Corporation Act requires a greater number of affirmative votes. SECTION 8. PROXIES; ELECTRONIC AUTHORIZATION (a) At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution, unless otherwise provided in the proxy. If a proxy for the same shares confers authority upon two or more persons and does not otherwise provide a majority of them present at the meeting or if only one is present at the meeting then that one may exercise all the powers conferred by the proxy; but if the proxy holders present at the meeting are divided as to the right and manner of voting in any particular case, and there is no majority, the voting of such shares shall be prorated. (b)The secretary may approve procedures to enable a shareholder or a shareholder's duly authorized attorney in fact to authorize another person or persons to act for him or her as proxy by transmitting or authorizing the transmission of a telegram, cablegram, internet transmission, telephone transmission or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such transmission must either set forth or be submitted with information from which the inspectors of election can determine that the transmission was authorized -23- by the shareholder or the shareholder's duly authorized attorney in fact. If it is determined that such transmissions are valid, the inspectors shall specify the information upon which they relied. Any copy, facsimile telecommunications or other reliable reproduction of the writing or transmission created pursuant to this Section 8 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. SECTION 9. VOTING OF SHARES. Except as otherwise provided by law, each outstanding share of capital stock of the corporation entitled to vote shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. The vote of a majority of the shares voted on any matter at a meeting of shareholders at which a quorum is present shall be the act of the shareholders on that matter, unless the vote of a greater number is required by law or by the Articles of Incorporation or Bylaws. Voting on all substantive matters shall be by a ballot vote on that particular matter. Voting on procedural matters shall be by voice vote or by a show of hands unless the holders of one-tenth of the shares represented at the meeting shall demand a ballot vote on procedural matters. SECTION 10. CONDUCT OF MEETINGS. At each meeting of the stockholders, the Chairman of the Board shall act as chairman and preside. In his absence, the Chairman of the Board may designate another officer or director to preside. The Secretary or an Assistant Secretary, or in their absence, a person whom the Chairman of such meeting shall appoint, shall act as secretary of the meeting. At any meeting of stockholders, only business that is properly brought before the meeting may be presented to and acted upon by stockholders. To be properly brought before the meeting, business must be brought (a) by or at the direction of the Board of Directors or (b) by a stockholder who has given written notice of business he expects to bring before the meeting to the Secretary not less than 15 days prior to the meeting. If mailed, such notice shall be sent by certified mail, return receipt requested, and shall be deemed to have been given when received by the Secretary. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business to be brought before the meeting and the reasons for conducting such business at the meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the corporation's stock beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. No business shall be conducted at a meeting of stockholders except in accordance with the procedures set forth in this Section 10. The chairman of a meeting of stockholders shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 10, and if he should so -24- determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Any nomination for director made by a stockholder must be made in writing to the Secretary not less than 15 days prior to the meeting of stockholders at which Directors are to be elected. If mailed, such notice shall be sent by certified mail, return receipt requested, and shall be deemed to have been given when received by the Secretary. A stockholder's nomination for director shall set forth (a) the name and business address of the stockholder's nominee, (b) the fact that the nominee has consented to his name being placed in nomination, (c) the name and address, as they appear on the corporation's books, of the stockholder making the nomination, (d) the class and number of shares of the corporation's stock beneficially owned by the stockholder, and (e) any material interest of the stockholder in the proposed nomination. Notwithstanding compliance with this Section 10, the chairman of a meeting of stockholders may rule out of order any business brought before the meeting that is not a proper matter for stockholder consideration. This Section 10 shall not limit the right of stockholders to speak at meetings of stockholders on matters germane to the corporation's business, subject to any rules for the orderly conduct of the meeting imposed by the Chairman of the meeting. The corporation shall not have any obligation to communicate with stockholders regarding any business or director nomination submitted by a stockholder in accordance with this Section 10 unless otherwise required by law. ARTICLE III. BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. The business and affairs of the corporation shall be managed by the Board of Directors except as otherwise provided by law, by the Articles of Incorporation or by the Bylaws. SECTION 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors of the Corporation shall be 10, divided into three classes: Class I, (three), Class II, (four), and Class III, (three). One director shall be designated and elected by the Board as Chairman of the Board of Directors, and shall preside at all meetings of the Board of Directors. The Board may elect a Vice-Chairman whose only duties shall be to preside at Board meetings in the absence of the Chairman. Directors need not be residents of the State of North Carolina or shareholders of the corporation. Subject to the Articles of Incorporation, the Board of Directors shall each year, prior to the annual meeting, determine by appropriate resolution the number of directors which shall constitute the Board of Directors for the ensuing year, and the number of directors which shall constitute the class of directors being elected at such annual meeting. The directors may amend the Bylaws between meetings of shareholders to increase or decrease the number of directors to make vacancies available for the election of new directors. -25- SECTION 3. FOUNDING DIRECTOR. A Founding Director is a person who was a director when it became a public company in 1961, who was a director on November 7, 1980, and who has served continuously as a director since 1961. SECTION 4. QUARTERLY MEETINGS. Quarterly meetings of the Board of Directors shall be held at a time and place determined by the Chairman of the Board of Directors. Any one or more of the directors or members of a committee designated by the directors may participate in a meeting of the Board or committee by means of a conference telephone or similar communications device which allows all persons participating in the meeting to hear each other and such participation in a meeting will be deemed presence in person. SECTION 5. SPECIAL MEETINGS. Special Meetings of the Board of Directors may be called by or at the request of the Chairman of the Board of Directors or two of the directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of North Carolina, as the place for holding any special meeting of the Board of Directors called by them. SECTION 6. NOTICE. Notice of any special meeting shall be given by either mail, facsimile or telephone. Notice of any special meeting given by mail shall be given at least five days previous thereto. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail properly addressed, with postage thereon prepaid. If notice is given by facsimile or by telephone, it shall be done so at least two days prior to the special meeting and shall be deemed given at the time the facsimile is transmitted or of the telephone call itself. Any director may waive notice of any meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 7. QUORUM. A majority of the number of directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. SECTION 8. MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless otherwise required by the Articles of Incorporation. SECTION 9. VACANCIES. Any vacancy occurring in the Board of Directors shall be filled as provided in the Articles of Incorporation. -26- SECTION 10. COMPENSATION. The directors may be paid such expenses as are incurred in connection with their duties as directors. The Board of Directors may also pay to the directors compensation for their service as directors. SECTION 11. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 12. ACTION WITHOUT MEETING. Action taken by a majority of the Board, or a Committee thereof, without a meeting is nevertheless Board, or Committee, action if written consent to the action in question is signed by all of the directors, or Committee members, and filed with the minutes of the proceedings of the Board, or Committee, whether done before or after the action so taken. SECTION 13. INFORMAL ACTION BY DIRECTORS. Action taken by a majority of the directors without a meeting is action of the Board of Directors if written consent to the action is signed by all of the directors and filed with the minutes of the proceedings of the Board of Directors, whether done before or after the action so taken. SECTION 14. COMMITTEES GENERALLY. Committees of the Board of Directors shall be reestablished annually at the first Board of Directors Meeting held subsequent to the Annual Shareholders Meeting. Directors designated to serve on committees shall serve as members of such committees until the first Board of Directors Meeting following the next succeeding Annual Shareholders Meeting or until their successors shall have been duly designated. The Board of Directors may designate a committee chairman and a committee vice chairman from the membership for each committee established. In the absence of the designation of a committee chairman or vice chairman by the Board, a committee by majority vote may elect a chairman or vice chairman from its own membership. SECTION 15. EXECUTIVE COMMITTEE. (a) The Board may establish an Executive Committee comprising not less than three members. This Committee may exercise all of the authority of the Board of Directors to the full extent permitted by law, but shall not have power: i) To declare dividends or authorize distributions; -27- ii) To approve or propose to shareholders any action that is required to be approved by shareholders under the North Carolina Business Corporation Act; iii) To approve an amendment to the Articles of Incorporation of the Corporation; iv) To approve a plan of dissolution; merger or consolidation; v) To approve the sale, lease or exchange of all or substantially all of the property of the Corporation; vi) To designate any other committee, or to fill vacancies in the Board of Directors or other committees; vii) To fix the compensation of directors for serving on the Board of Directors or any committee; vii) To amend or repeal the Bylaws, or adopt new Bylaws; ix) To authorize or approve reacquisition of shares, except according to a formula or method approved by the Board of Directors; x) To authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, unless the Board of Directors specifically authorizes the Executive Committee to do so within limits established by the Board of Directors; xi) To amend, or repeal any resolution of the Board of Directors which by its terms is not so amendable or repealable; or xii) To take any action expressly prohibited in a resolution of the Board of Directors. SECTION 16. AUDIT COMMITTEE. The Board may establish an Audit Committee comprising not less than three members, all of whom shall be non-employee directors. The Committee shall aid the Board in carrying out its responsibilities for accurate and informative financial reporting, shall assist the Board in making recommendations with respect to management's efforts to maintain and improve financial controls, shall review reports of examination by the independent auditors, and except as otherwise required by law, shall have authority to act for the Board in any matter delegated to this Committee by the Board of Directors. The Committee shall recommend each year an independent certified public accounting firm as independent auditors for the Corporation. The -28- Corporation's Head of Internal Audit shall report to the Audit Committee, and his employment may only be terminated with the approval of the Committee. SECTION 17. COMPENSATION COMMITTEE. The Board may establish a Compensation Committee comprising not less than three members, all of whom shall be non-employee directors. Except as otherwise required by law, the Compensation Committee shall have authority to act for the Board in any matter delegated to this Committee by the Board of Directors. SECTION 18. GOVERNANCE COMMITTEE. The Board may establish a Governance Committee comprising not less than three members, all of whom shall be non-employee directors. Except as otherwise required by law, the Governance Committee shall have authority to act for the Board in any matter delegated to this Committee by the Board of Directors. SECTION 19. GOVERNMENT/LEGAL AFFAIRS COMMITTEE. The Board may establish a Government/Legal Affairs Committee to consist of not less than three directors. Except as otherwise required by law, the Government/Legal Affairs Committee shall have authority to act for the Board in any manner delegated to this Committee by the Board of Directors. SECTION 20. SALARY ADMINISTRATION; DIRECTORS COMPENSATION. The compensation of employees not covered by the Compensation Committee duties shall be the responsibility of the Chief Executive Officer. The compensation of independent directors shall be recommended to the Board of Directors by the Chief Executive Officer. ARTICLE IV. INDEMNIFICATION SECTION 1. INDEMNIFICATION. In addition to any indemnification required or permitted by law, and except as otherwise provided in these Bylaws, any person who at any time serves or has served as a director or officer of the corporation, or in such capacity at the request of the corporation for any other corporation, partnership, joint venture, trust or other enterprise, shall have a right to be indemnified by the corporation to the fullest extent permitted by law against (i) reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, seeking to hold him liable by reason of the fact that he is or was acting in such capacity, and (ii) payments made by him in satisfaction of any judgment, money decree, fine, penalty or reasonable settlement for which he may have become liable in any such action, suit or proceeding. -29- SECTION 2. LIMITATION ON INDEMNIFICATION. The corporation shall not indemnify any person hereunder against liability or litigation expense he may incur on account of his activities which were at the time taken known or believed by him to be clearly in conflict with the best interests of the corporation. The corporation shall not indemnify any director with respect to any liability arising out of N.C.G.S.Section 55-8-33 (relating to unlawful declaration of dividends) or any transaction from which the director derived an improper personal benefit as provided in N.C.G.S. Section 55-2-02(b)(3). SECTION 3. BOARD DETERMINATION. If any action is necessary or appropriate to authorize the corporation to pay the indemnification required by this Bylaw the Board of Directors shall take such action, including (i) making a good faith evaluation of the manner in which the claimant for indemnity acted and of the reasonable amount of indemnify due him, (ii) giving notice to, and obtaining approval by, the shareholders of the corporation, and (iii) taking any other action. SECTION 4. RELIANCE. Any person who at any time after the adoption of this Bylaw serves or has served in any of the capacities indicated in this Bylaw shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the right of indemnification provided herein. Such right shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from the provision of this Bylaw. SECTION 5. AGENTS AND EMPLOYEES. The provisions of this Bylaw shall not be deemed to preclude the corporation from indemnifying persons serving as agents or employees of the corporation, or in such capacity at the request of the corporation for any other corporation, partnership, joint venture, trust or other enterprise, to the extent permitted by law. SECTION 6. EXPENSES. The corporation shall be entitled to pay the expenses incurred by a director or officer in defending a civil or criminal action, suit or proceeding in advance of final disposition upon receipt of an undertaking by or on behalf of the director or officer to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation against such expenses. SECTION 7. INSURANCE. As provided by N.C.G.S. Section 55-8-57, the Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or who is or was serving at the request of the corporation as a director, officer or employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a trustee or administrator under an employee benefit plan against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation has the power to indemnify him against such liability. -30- ARTICLE V. OFFICERS SECTION 1. TITLES. The officers of the corporation may consist of the Chairman of the Board of Directors, Vice Chairmen, the President, and such Vice Presidents as shall be elected as officers by the Board of Directors. There shall also be a Secretary, Treasurer, Controller and such assistants thereto as may be elected by the Board of Directors. Any one person may hold one or more offices in the corporation. No officer may act in more than one capacity where action of two or more is required. SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the corporation shall be elected annually by the Board of Directors at the first meeting of the Board held after each annual meeting of the shareholders, or at any other meeting of said Board. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 3. REMOVAL. Since officers serve at the pleasure of the Board, any officer may be removed at any time by the Board of Directors, with or without cause. Termination of an officer's employment with the Corporation by the appropriate official (and by the Audit Committee for the Head of Internal Audit) shall also end his term as an officer. SECTION 4. CHAIRMAN OF THE BOARD OF DIRECTORS. There shall be a Chairman of the Board of Directors elected by the directors from their members. The Chairman shall preside at meetings of the Board of Directors, shall be the Chief Executive Officer of the corporation, and shall have direct supervision and control of all of the business affairs of the corporation, subject to the general supervision and control of the Board of Directors. The Chairman shall have power to sign certificates for shares of the corporation and any deeds, mortgages, bonds, contracts, or any other instruments or documents which may be lawfully executed on behalf of the corporation. The Chairman shall vote as agent for the corporation the capital stock held or owned by the corporation in any corporation. The Chairman is authorized to delegate the authority to vote capital stock held or owned by the corporation and to execute and deliver agreements and other instruments to other officers of the corporation. SECTION 5. VICE CHAIRMEN OF THE BOARD OF DIRECTORS. The Board of Directors may elect one or more Vice Chairmen from their members. A Vice Chairman shall preside at meetings of the Board of Directors in the absence of the Chairman. SECTION 6. PRESIDENT. The President perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. -31- SECTION 7. VICE PRESIDENTS. The Vice Presidents shall perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. SECTION 8. SECRETARY. The Secretary shall perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. SECTION 9. TREASURER. The Treasurer shall perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. SECTION 10. CONTROLLER. The Controller shall perform such duties and have such responsibilities as are assigned by the Board of Directors or the Chief Executive Officer. ARTICLE VI. DEPARTMENTAL DESIGNATIONS SECTION 1. DEPARTMENTAL DESIGNATIONS. The Chief Executive Officer may establish such departmental or functional designations or titles pertaining to supervisory personnel as the Chief Executive Officer in his discretion deems wise. The designations or titles may be that of Senior Vice President, Vice President or such other term or terms as the Chief Executive Officer desires to utilize. The designation or title contemplated by this section is for the purpose of administration within the department or function concerned and is not with the intent of designating those individuals bearing such titles as general officers of the corporation. These individuals bearing these titles shall be known as administrative managers of the corporation. ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES; NON-CERTIFICATED SHARES (a) Certificates representing shares of the corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the Chairman of the Board and by the Secretary, provided that where a certificate is signed by a transfer agent, assistant transfer agent or co-transfer agent of the corporation or with the duly designated transfer agent the signatures of such officers of the corporation upon the certificate may be facsimile engraved or printed. Each certificate shall be sealed with the seal of the corporation or a facsimile thereof. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and class and date of issue, shall be entered on the stock transfer books of the corporation, as the transfer agent. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and -32- canceled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe. (b)The Board of Directors may authorize the issuance of some or all of the shares of any or all of the corporation's classes or series of stock without certificates. Such authorization shall not affect shares already represented by certificates until such shares are surrendered to the corporation. Within a reasonable time after the issuance or transfer of shares without certificates, the corporation shall send the shareholder a written statement with information required on certificates by North Carolina General Statutes 55-6-25(b) and (c), and, if applicable, North Carolina General Statutes 55-6-27, or any successor law. SECTION 2. TRANSFER OF SHARES. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of records thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. To the extent that any provision of the Rights Agreement between the Company and Wachovia Bank, N.A., Rights Agent, dated as of September 9, 1998, is deemed to constitute a restriction on the transfer of any securities of the Company, including, without limitation, the Rights, as defined therein, such restriction is hereby authorized by the Bylaws of the Company. Transfer of shares not represented by certificates shall be made in accordance with such requirements with respect to transfer as appear in Article 8 of the Uniform Commercial Code as in effect from time to time in North Carolina. SECTION 3. LOST CERTIFICATES. The Board of Directors may authorize the issuance of a new certificate in place of a certificate claimed to have been lost or destroyed, upon receipt of an affidavit of such fact from the person claiming the loss or destruction. In authorizing such issuance of a new certificate, the Board may require the claimant to give the corporation a bond in such sum as it may direct to indemnify the corporation against loss from any claim with respect to the certificate claimed to have been lost or destroyed; or the Board, by resolution reciting that the circumstances justify such action, may authorize the issuance of the new certificate without requiring such a bond. This function or duty on the part of the Board may be assigned by the Board to the transfer agents of the common stock of the corporation. -33- ARTICLE VIII. FISCAL YEAR The fiscal year of the Corporation shall end on the Friday nearest to January 31 of each year. The fiscal year shall consist of four quarterly periods, each comprising 13 weeks, with the 13-week periods divided into three periods of four weeks, five weeks, and four weeks. Every six to eight years, the fiscal year shall be a 53-week year, with the fourth period comprising four weeks, five weeks, and five weeks, to reflect the 365th day of each year and the 29th day of February in leap year. ARTICLE IX. DIVIDENDS The Board of Directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and as provided in a resolution of the Board of Directors. ARTICLE X. SEAL The Board of Directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the corporation, the state of incorporation, and the word "Seal". ARTICLE XI. WAIVER OF NOTICE Whenever any notice is required to be given to any shareholder or director of the corporation under the provisions of the charter or under the provisions of applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE XII. AMENDMENTS Unless otherwise prescribed by law or the charter, these Bylaws may be amended or altered at any meeting of the Board of Directors by affirmative vote of a majority of the directors. Unless otherwise prescribed by law or the charter, the shareholders entitled to vote in respect of the election of directors, however, shall have the power to rescind, amend, alter or repeal any Bylaws and to enact Bylaws which, if expressly so provided, may not be amended, altered or repealed by the Board of Directors. 7 -----END PRIVACY-ENHANCED MESSAGE-----