<PAGE> -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 October 27, 2000
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 Identification No.)
incorporation or organization)
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 November 24, 2000
Common Stock, $.50 par value 382,871,747
31
TOTAL PAGES
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LOWE'S COMPANIES, INC.
- INDEX -
Page No.
PART I - Financial Information:
Consolidated Balance Sheets - October 27, 2000 (Unaudited),
October 29, 1999 (Unaudited) and January 28, 2000 3
Consolidated Statements of Current and
Retained Earnings (Unaudited) - quarter and nine months
ended October 27, 2000 and October 29, 1999 4
Consolidated Statements of Cash Flows (Unaudited) -
nine months ended October 27, 2000 and October 29, 1999 5
Notes to Unaudited Consolidated Financial Statements 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
Independent Accountants' Report 12
PART II - Other Information 13
Item 6 (a) - Exhibits
EXHIBIT INDEX 14
<PAGE> -3-
<TABLE>
Lowe's Companies, Inc.
Consolidated Balance Sheets
In Thousands
<CAPTION>
(Unaudited) (Unaudited)
October 27, October 29, January 28,
2000 1999 2000
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $128,746 $623,426 $491,122
Short-term investments 10,706 81,668 77,670
Accounts receivable - net 173,784 177,705 147,901
Merchandise inventory 3,500,202 2,820,000 2,812,361
Deferred income taxes 69,000 47,004 53,145
Other assets 210,151 127,403 127,342
Total current assets 4,092,589 3,877,206 3,709,541
Property, less
accumulated depreciation 6,439,167 4,851,439 5,177,222
Long-term investments 37,213 32,404 31,114
Other assets 105,785 98,709 94,446
Total assets $10,674,754 $8,859,758 $9,012,323
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $248,402 $92,475 $92,475
Current maturities
of long-term debt 42,160 98,990 59,908
Accounts payable 1,797,764 1,549,447 1,566,946
Employee retirement plans 89,015 71,335 101,946
Accrued salaries and wages 179,406 172,481 164,003
Other current liabilities 529,633 406,746 400,676
Total current liabilities 2,886,380 2,391,474 2,385,954
Long-term debt, excluding
current maturities 2,209,806 1,733,312 1,726,579
Deferred income taxes 228,456 184,838 199,824
Other long-term liabilities 3,882 4,468 4,495
Total liabilities 5,328,524 4,314,092 4,316,852
Shareholders' equity
Preferred stock - $5 par value,
none issued - - -
Common stock - $.50 par value;
Issued and Outstanding
October 27, 2000 382,862
October 29, 1999 382,276
January 28, 2000 382,359 191,431 191,138 191,179
Capital in excess of par 1,768,850 1,745,958 1,755,616
Retained earnings 3,390,914 2,626,367 2,761,964
Unearned compensation-
restricted stock awards (4,876) (17,549) (12,868)
Accumulated other
comprehensive loss (89) (248) (420)
Total shareholders' equity 5,346,230 4,545,666 4,695,471
Total liabilities and
shareholders' equity $10,674,754 $8,859,758 $9,012,323
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
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<TABLE>
Lowe's Companies, Inc.
Consolidated Statements of Current and Retained Earnings (Unaudited)
In Thousands, Except Per Share Data
<CAPTION>
Quarter Ended Nine Months Ended
October 27, 2000 October 29, 1999 October 27, 2000 October 29, 1999
Current Earnings Amount Percent Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $4,504,141 100.00 $3,909,188 100.00 $14,235,507 100.00 $12,116,326 100.00
Cost of sales 3,204,769 71.15 2,819,639 72.13 10,235,992 71.90 8,832,401 72.90
Gross margin 1,299,372 28.85 1,089,549 27.87 3,999,515 28.10 3,283,925 27.10
Expenses:
Selling, general
and administrative 809,427 17.97 692,394 17.71 2,473,187 17.37 2,061,566 17.02
Store opening costs 37,161 0.83 25,722 0.66 90,798 0.64 59,397 0.49
Depreciation 104,681 2.32 86,440 2.21 296,664 2.08 246,083 2.03
Interest 28,021 0.62 18,921 0.48 80,258 0.57 64,324 0.53
Nonrecurring merger costs - - - - - - 24,378 0.20
Total expenses 979,290 21.74 823,477 21.06 2,940,907 20.66 2,455,748 20.27
Pre-tax earnings 320,082 7.11 266,072 6.81 1,058,608 7.44 828,177 6.83
Income tax provision 117,789 2.62 97,384 2.49 389,567 2.74 304,314 2.51
Net earnings $202,293 4.49 $168,688 4.32 $669,041 4.70 $523,863 4.32
Shares outstanding - Basic 382,840 382,168 382,691 380,869
Basic earnings per share $0.53 $0.44 $1.75 $1.38
Shares outstanding - Diluted 384,375 384,348 384,440 383,542
Diluted earnings per share $0.53 $0.44 $1.74 $1.37
Retained Earnings
Balance at beginning
of period $3,201,989 $2,469,102 $2,761,964 $2,136,728
Net earnings 202,293 168,688 669,041 523,863
Cash dividends (13,368) (11,423) (40,091) (34,224)
Balance at end
of period $3,390,914 $2,626,367 $3,390,914 $2,626,367
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
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<TABLE>
Lowe's Companies, Inc.
Consolidated Statements of Cash Flows (Unaudited)
In Thousands
<CAPTION>
For the Nine Months Ended
October 27, October 29,
Periods Ended On 2000 1999
<S> <C> <C>
Cash Flows From Operating Activities:
Net Earnings $669,041 $523,863
Adjustments to Reconcile
Net Earnings to Net Cash Provided By
Operating Activities:
Depreciation 296,664 246,083
Amortization of Original Issue Discount 570 467
Deferred Income Taxes 12,642 4,505
Loss on Disposition/Writedown
of Fixed and Other Assets 20,281 43,252
Tax Effect of Stock Options Exercised 5,196 3,622
Changes in Operating Assets and Liabilities:
Accounts Receivable - Net (25,883) (33,777)
Merchandise Inventory (687,841) (435,300)
Other Operating Assets (82,632) (77,872)
Accounts Payable 230,818 328,905
Employee Retirement Plans (12,998) 45,381
Other Operating Liabilities 150,712 199,733
Net Cash Provided by Operating Activities 576,570 848,862
Cash Flows from Investing Activities:
(Increase) Decrease in Investment Assets:
Short-Term Investments 75,288 (55,989)
Purchases of Long-Term Investments (13,957) (12,447)
Proceeds from Sale/Maturity
of Long-Term Investments - 2,531
Increase in Other Long-Term Assets (30,964) (12,152)
Fixed Assets Acquired (1,614,455) (1,045,897)
Proceeds from the Sale of Fixed
and Other Long-Term Assets 55,013 34,685
Net Cash Used in Investing Activities (1,529,075) (1,089,269)
Cash Flows from Financing Activities:
Net Increase (Decrease) in Short-Term Borrowings 155,927 (24,600)
Long-Term Debt Borrowings 519,402 394,590
Repayment of Long-Term Debt (54,493) (62,487)
Proceeds from Stock Offering - 348,299
Proceeds from Stock Options Exercised 9,384 13,381
Cash Dividend Payments (40,091) (34,224)
Net Cash Provided by Financing Activities 590,129 634,959
Net Increase (Decrease)in Cash and Cash Equivalents (362,376) 394,552
Cash and Cash Equivalents, Beginning of Period 491,122 228,874
Cash and Cash Equivalents, End of Period $128,746 $623,426
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
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Lowe's Companies, Inc.
Notes to Consolidated Financial Statements
Note 1: The accompanying Consolidated Financial Statements (unaudited)
have been reviewed by independent certified public accountants, and
in the opinion of management, they contain all adjustments
necessary to present fairly the financial position as of
October 27, 2000, and the results of operations and the cash flows
for the nine months ended October 27, 2000 and October 29, 1999.
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 28, 2000. The financial results for
the interim periods may not be indicative of the financial results
for the entire fiscal year.
Note 2: 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.
<TABLE>
Note 3: Net interest expense is composed of the following (in thousands):
<CAPTION>
Quarter ended Nine months ended
Oct. 27, 2000 Oct. 29, 1999 Oct. 27, 2000 Oct. 29,1999
<S> <C> <C> <C> <C>
Long-term debt $ 32,698 $ 23,673 $ 83,971 $ 70,139
Capitalized leases 10,261 10,511 30,952 31,674
Short-term debt 1,848 1,311 5,900 4,387
Amortization of loan cost 350 236 880 730
Short-term interest income (6,232) (11,592) (19,803) (29,367)
Interest capitalized on
construction in progress ( 10,904) (5,218) (21,642) (13,239)
Net interest expense $ 28,021 $ 18,921 $ 80,258 $ 64,324
</TABLE>
Note 4: Inventory is stated at the lower of cost or market using the first-
in, first-out inventory accounting method.
Note 5: Property is shown net of accumulated depreciation of $1.5 billion
at October 27, 2000, $1.2 billion at October 29, 1999 and $1.2
billion at January 28, 2000.
Note 6: Supplemental disclosures of cash flow information (in thousands):
Nine months ended
Oct. 27, 2000 Oct. 29, 1999
Cash paid for interest (net of capitalized) $ 122,964 $ 116,712
Cash paid for income taxes 344,779 289,677
Non-cash investing and financing activities:
Common stock issued to ESOP - 59,691
Fixed assets acquired under capital lease - 27,561
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Note 7: In January 2000, the Board of Directors authorized the funding of
the Fiscal 1999 ESOP contribution primarily with the purchase of
existing shares of the Company's common stock. During the first
nine months of Fiscal 2000, the Company completed its funding of the
1999 ESOP by contributing $90 million toward the purchase of the
shares on the open market. As of October 27, 2000, the Company
purchased 1,653,496 shares with a total cost of $86,999,937.
Note 8: On May 31, 2000, the Company issued $500 million principal of 8.25%
Notes due June 1, 2010. The notes were issued at an original price
of $990.90 per $1,000 principal amount, net of the original issue
discount and underwriters' discount. The notes may not be redeemed
prior to maturity. The notes were issued under a $1 billion shelf
registration statement filed with the Securities and Exchange
Commission in April 2000.
Note 9: Total comprehensive income, comprised of net earnings and unrealized
holding gains (losses) on available-for-sale securities, was $202.4
million and $168.5 million for the quarters ended October 27, 2000
and October 29, 1999, respectively, compared to reported net
earnings of $202.3 million and $168.7 million for the third quarter
of 2000 and 1999. Total comprehensive income was $669.4 million and
$523.2 million for the nine months ended October 27, 2000 and
October 29, 1999 respectively, compared to reported net earnings of
$669.0 million and $523.9 million for the first nine months of 2000
and 1999.
<PAGE> -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 nine months ended October 27, 2000. This discussion
should be read in conjunction with the financial statements and financial
statement footnotes that are included in the Company's fiscal 1999 Form 10-K.
OPERATIONS
For the third quarter of fiscal 2000, sales increased 15% to $4.5
billion, comparable store sales were flat for the quarter, and net earnings
rose 20% to $202.3 million compared to last year's third quarter results.
Diluted earnings per share was $.53 compared to $.44 for the comparable
quarter of last year. For the nine months ended October 27, 2000, sales
increased 17% to $14.2 billion, comparable store sales increased 2.6% and net
earnings increased 28% to $669.0 million compared to the first nine months of
1999. Earnings per share for the first nine months of 1999 included a one-
time charge of $.04 per share for costs relating to the Company's merger with
Eagle Hardware & Garden, Inc. (Eagle). Excluding the one-time charge, net
earnings for the nine months ended October 27, 2000 increased 24% and diluted
earnings per share increased 23% over the same period a year ago.
The sales increase in the third quarter was attributable to the addition
of 11 million square feet of retail selling space relating to new and
relocated stores since last year's third quarter. Comparable store sales
performance was negatively impacted by the remerchandising of former Eagle
Hardware & Garden stores, deflation in lumber prices and a softer economy
during the third quarter of 2000. During the third quarter, the Company
experienced its strongest sales increases in appliances, kitchen cabinets and
furniture; floors, windows and walls; nursery and gardening products; fashion
plumbing and outdoor hardlines.
Gross margin was 28.85% of sales for the quarter ended October 27, 2000
compared to 27.87% for last year's comparable quarter. Gross margin for the
nine months ended October 27, 2000 was 28.10% of sales versus 27.10% during
the first nine months of 1999. The increase in margin rate for the quarter
and first nine months of 2000 is primarily due to favorable changes in product
mix, ongoing store pricing disciplines and lower product costs.
Selling, general and administrative expenses (SG&A) were 17.97% of sales
versus 17.71% in last year's third quarter. SG&A increased by 17% compared to
the 15% increase in sales for the quarter. During the first nine months of
2000, SG&A was 17.37% of sales compared to 17.02% for the same period last
year. SG&A increased by 20% compared to the 17% increase in sales for the
first nine months of 2000. Lower than expected sales levels, which were
partially offset by lower store bonus expense and lower net credit card
program expense, were the significant factors causing the increase in SG&A as
a percent of sales during the third quarter and first nine months of 2000.
<PAGE> -9-
Store opening costs were $37.2 million for the quarter ended October 27,
2000 compared to $25.7 million last year, representing costs associated with
the opening of 27 stores during the current year's third quarter (24 new and 3
relocated) compared to 22 stores for the comparable period last year (14 new
and 8 relocated). Charges in this quarter for future and prior openings were
$12.9 million compared to $7.7 million in last year's third quarter. Store
opening costs for the nine months ended October 27, 2000 were $90.8 million
compared to $59.4 million last year. These costs were associated with the
opening of 64 stores during the first nine months of 2000 (51 new, 12
relocated and 1 contractor yard) compared to 56 stores (30 new and 26
relocated) opened during the first nine months of 1999. The Company's 2000
expansion plans are discussed under "Liquidity and Capital Resources" below.
Depreciation was $104.7 million for the quarter ended October 27, 2000
and $296.7 million for the nine months then ended. This represents an
increase of 21% 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 ongoing expansion program.
Interest expense increased from $18.9 million and $64.3 million to $28.0
million and $80.3 million for the quarter and nine months ended October 27,
2000, respectively. Interest has increased during the current year's third
quarter primarily due to interest expense relating to the issuance of $500
million principal of 8.25% Notes on May 31, 2000. Interest expense for the
first nine months of 2000 primarily increased due to interest expense on the
notes mentioned above and interest expense on debentures issued during the
first nine months of 1999.
The Company's effective income tax rate was 36.80% for the quarter ended
October 27, 2000 and 36.60% for last year's third quarter. The effective
rate was 36.80% compared to 36.75% for the first nine months of 2000 and 1999,
respectively. The higher rate for the quarter and nine months ended October
27, 2000 is primarily related to expansion into states with higher income tax
rates. The effect of higher state tax rates for the nine months ended October
27, 2000 was partially offset by non-deductible merger costs incurred during
the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity during the third quarter of 2000 were
cash flows from operating activities and certain financing activities. Net
cash provided by operating activities was $576.6 million for the nine months
ended October 27, 2000 compared to $848.9 million for the first nine months of
fiscal 1999. The $272.3 million decrease in the current year resulted
primarily from a larger increase in merchandise inventory combined with a
smaller increase in accounts payable and the earlier funding of the Company's
ESOP with cash as opposed to stock. These factors were partially offset by
the increase in earnings. The Company's working capital was $1.2 billion at
October 27, 2000 compared to $1.5 billion at October 29, 1999 and $1.3 billion
at January 28, 2000. The decrease in working capital for the third quarter of
2000 is primarily attributable to excess cash obtained from debt and equity
offerings in the prior year that had not yet been committed to the Company's
expansion program.
<PAGE> -10-
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 $1.6 billion and $1.0 billion for the
nine months ended October 27, 2000 and October 29, 1999, respectively. At
October 27, 2000, the Company operated 624 stores in 40 states with 63.8
million square feet of retail selling space, a 21% increase over the selling
space as of October 29, 1999.
Cash flows provided by financing activities were $590.1 and $635.0
million for the nine months ended October 27, 2000 and October 29, 1999,
respectively. The major sources of cash during the first nine months of 2000
involved the issuance of $500 million principal of 8.25% Notes due June 1,
2010 and the issuance of commercial paper with a face amount of $150 million
due in December 2000. The notes were issued at an original price of $990.90
per $1,000 principal amount, net of the original issue discount and
underwriters' discount. The notes may not be redeemed prior to maturity. The
notes were issued under a $1 billion shelf registration statement filed with
the Securities and Exchange Commission in April 2000. The major source of
cash provided by financing activities in the first nine 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 its
expansion of retail sales floor square footage by entering new markets and by
relocating from older, smaller format stores to larger, more modern stores.
The Company's 2000 capital budget is $2.2 billion, inclusive of approximately
$225 million in operating or capital leases. Approximately 85% of this
planned commitment is for store expansion and new distribution centers.
Expansion plans for 2000 consist of approximately 95 stores (including the
relocation of 12 to 15 older, smaller format stores). This planned expansion
is expected to increase sales floor square footage by approximately 18%.
Expansion in the first nine months of fiscal 2000 included 51 new stores, 12
relocations and 1 contractor yard representing 6.9 million square feet of new
incremental retail space.
The Company believes that funds from operations, debt issuances, leases
and existing short-term credit agreements will be adequate to finance the 2000
expansion plan and other operating requirements.
MARKET RISK
As discussed in the annual report for the year ended January 28, 2000,
the Company's major market risk exposure is the potential loss arising from
changing interest rates and its impact 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 risks have not changed
materially since January 28, 2000.
<PAGE> -11-
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 was to be effective for fiscal years beginning after June 15,
1999. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," making the standard effective for the Company in the year
beginning February 3, 2001. SFAS 133 was also amended in June 2000 by
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" (SFAS 138). SFAS 133
and SFAS 138 expand the definition of a derivative to include embedded
derivatives and requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and that they be measured at fair
value. Management does not believe that the adoption of SFAS 133 will have a
material impact, if any, 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
comments reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct. Possible
risks and uncertainties regarding these statements include, but are not
limited to, the direction of general economic trends, the availability of real
estate for expansion and its successful development, the availability of
sufficient labor to facilitate growth, fluctuations in prices and availability
of product, unanticipated increases in competition, weather conditions that
effect sales and greater than anticipated disruption associated with the
integration of Eagle Hardware and Garden with Lowe's.
<PAGE> -12-
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
Lowe's Companies, Inc.:
We have reviewed the accompanying consolidated balance sheets of Lowe's
Companies, Inc. and subsidiaries (the "Company") as of October 27, 2000 and
October 29, 1999, and the related consolidated statements of current and
retained earnings for the three-month and nine-month periods ended October 27,
2000 and October 29, 1999 and consolidated statements of cash flows for the
nine months ended October 27, 2000 and October 29, 1999. These financial
statements are the responsibility of the Company's management.
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 auditing standards generally accepted in the
United States of America, 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 accounting principles generally accepted in the United States
of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Lowe's Companies, Inc. and subsidiaries as of January 28, 2000, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
February 17, 2000, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of January 28, 2000 is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
November 8, 2000
<PAGE> -13-
Part II - OTHER INFORMATION
Item 6 (a) - Exhibits
(3.1) Restated Charter, November 7, 2000
27. Financial Data Schedule (only submitted to the SEC in
electronic format).
Refer to the Exhibit Index on page 14.
Item 6 (b) - Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended October
27, 2000.
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.
December 8, 2000 /s/ Kenneth W. Black, Jr.
Date_________________ _______________________________
Kenneth W. Black, Jr.
Senior Vice President and Chief Accounting Officer
<PAGE> -14-
EXHIBIT INDEX
Page No.
Exhibit 3.1 - Restated Charter, November 7, 2000 15 - 31