1998 Annual Report - Morningstar

1998 Annual Report - Morningstar

Cover Page 1998 Annual Report Next Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/index.html [...

1MB Sizes 0 Downloads 5 Views

Recommend Documents

Sears Annual Report 1998 - Morningstar
discounters and department stores, which partially offset solid hardgoods results in home ..... What role does Sears Cre

2008 Annual Report - Morningstar
Oct 5, 2010 - ownership interest in Wellsford Park Highlands Corporation, an entity which owns a condominium ...... Trum

annual report 2002 - Morningstar
The core activity of the H+H Group is the manufacture and sale of aircrete, ... system solutions for solid aircrete buil

tvsn annual report - Morningstar
Aug 17, 1999 - The China operations were disposed of by TVSN with effect 30 April ... To assist in the above, TVSN raise

Annual Report - Morningstar
Equitable mortgage of land and buildings thereon at SF No.375/1B1 - Extent 79 cents and 253 sq ft of land with buildings

Annual Report - Morningstar
repairy shipyard site by Hong Kong Ferry (Holdings) and the Group in two phases. The entire project ..... Guangzhou as w

annual report 2009 - Morningstar
Jan 9, 2009 - The Remuneration Committee comprised of Andrew Sasson .... Sasson has been a prominent participant in the

Annual Report 1998 - Pernod Ricard
Patrick Ricard:“1998 was a successful year for groupe. Pernod Ricard. We reported an 8% increase in turnover. All of o

macdonald dettwiler annual report - Morningstar
support as we strive to become the leading provider of essential information. Daniel E. Friedmann. President and CEO. Br

annual report 2002 - 2003 - Morningstar
Jun 30, 2003 - headlines in Vijay Karnataka than any other newspaper. And to ... For a newcomer in the field, its founde

Cover Page

1998 Annual Report

Next

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/index.html [4/18/2001 5:55:16 PM]

CORPORATE PROFILE Founded in 1978, The Home Depot® is the world’s largest home improvement retailer and ranks among the 10 largest retailers in the United States, with fiscal 1998 sales of $30.2 billion. At the close of fiscal 1998, the Company was operating 761 stores, including 707 Home Depot stores and 8 EXPO® Design Center stores in the United States; 43 Home Depot stores in Canada; 2 Home Depot stores in Chile; and 1 Home Depot store in Puerto Rico; as well as wholly-owned subsidiaries Maintenance Warehouse® and National Blinds and Wallpaper, Inc. The Company employed approximately 157,000 associates at the end of fiscal 1998. The Company has been publicly held since 1981. The Home Depot stock trades on the New York Stock Exchange under the ticker symbol “HD” and is included in the Standard & Poor’s 500 Index. The Company has been named America’s most admired specialty retailer by Fortune magazine for six consecutive years.

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/corp_profile.html [4/18/2001 5:55:21 PM]

Table of Contents

Contents Cover Page Financial Highlights Letters to Stockholders Business Overview We're Here For You Innovation Cultivates Loyalty We Help You Do It All Serving More Customers in New Ways Driving the Brand Reaching Out Management's Discussion and Analysis of Results of Operations Consolidated Statements of Earnings Consolidated Balance Sheets Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flow Notes to Consolidated Financial Statements Management's Responsibility for Financial Statements Independent Auditor's Report Ten-Year Summary of Financial and Operating Results Board of Directors Back Cover

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/toc.html (1 of 2) [4/18/2001 5:55:26 PM]

Table of Contents

Whether you're a do-it-yourselfer or a pro; a homeowner or a contractor; whether it's a small fix-it project or a major renovation, The Home Depot has what you need: answers. Products, prices, tools, techniques and knowledge are the answers to all of your home improvement questions, and The Home Depot makes it easy to get all of them in one place. The key is customer service - the result is HAPPY CUSTOMERS.

Back

Next

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/toc.html (2 of 2) [4/18/2001 5:55:26 PM]

Financial Highlights

FINANCIAL HIGHLIGHTS

HERE'S HOW FISCAL 1998 STACKED UP: ● ● ● ●

13th consecutive year of record sales and earnings Number of stores increases 22% Comparable store sales up 7% Strong sales productivity - Average ticket $45.05, up 3% - Average annual store sales volume $43.9 million, up 2% - Sales per square foot $410, up 1%

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/fin_high.html (1 of 2) [4/18/2001 5:55:34 PM]

Financial Highlights

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/fin_high.html (2 of 2) [4/18/2001 5:55:34 PM]

To Shareholders

1998 was an outstanding and pivotal year. TO OUR STOCKHOLDERS, CUSTOMERS AND ASSOCIATES. Fiscal 1998 was nothing short of outstanding for The Home Depot. Against the backdrop of a healthy economic and housing environment, we outpaced the industry in producing very strong financial results. At the same time, we continued to solidify innovative and aggressive plans for the future. Our list of specific accomplishments during fiscal 1998 begins with the highest net earnings as a percent of sales in the history of our Company. For a $30 billion corporation, we remain agile and efficient, opening new stores at a consistent rate and squeezing more productivity out of our assets to enhance returns. During fiscal 1998 we opened a net of 137 stores in a variety of new and existing markets. We ended the year with 761 stores but, more importantly to investors, with opportunities for continued store growth, including further expansion in all of our existing markets. We also improved the performance of our existing stores. We did this by listening and responding to our customers’ needs, offering new products and services, and utilizing technology or other resources to allow our associates to spend more face-to-face time with customers in the store aisles. All of these things added value to the shopping experience and increased our store productivity. BERNARD MARCUS Chairman of the Board

None of these accomplishments was a piece of cake. Many companies benefited from the strong economic environment, but few companies reached our heights. We also know that the bigger and better we get, the higher the hurdles become. Therefore, it is incumbent upon us to challenge and continuously improve the way we run our business.

As I look at the events of fiscal 1998, I am particularly pleased with all of the things we did during the year to position The Home Depot for a strong future. My partner from day-one, Arthur Blank, has made terrific strides in moving our shared vision for the Company closer to fruition during his first full year as CEO. As a result, we are firmly positioned to thrive in an industry that offers many opportunities for long-term growth. As for me, my passion for the business keeps me heavily involved in our stores, training managers, working on new merchandising strategies and keeping the orange blood flowing. And, as a great believer in the free enterprise system, I am increasingly involved in representing The Home Depot and the industry’s interests in political and legislative matters such as civil justice reform, trade and tax issues and other governmental affairs. The progress we can make in each of these areas today is a valuable investment in our Company’s and our nation’s futures. I am proud of all of our associates and their contributions to an awesome year for our Company. Their commitment to serving customers, whether in the stores or behind the scenes, has always been the key to our success. It is also the key to our future, as we reach further into the industry to serve more customers and continue to grow our leadership position in the industry.

Bernard Marcus Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/letterto.html (1 of 5) [4/18/2001 5:55:42 PM]

To Shareholders

Chairman of the Board March 12, 1999

DEAR FELLOW STOCKHOLDERS, CUSTOMERS AND ASSOCIATES At first glance, our performance in fiscal 1998 might not look much different than trends in previous years: consistent sales and earnings growth, a steady rate of new store openings, strong comparable store sales performance, all resulting in the 13th consecutive year of record earnings delivered to our stockholders. Was fiscal 1998 more of the same old stuff? Hardly. It is clear to Bernie and me that fiscal 1998 was a pivotal year for The Home Depot – a year during which we firmly positioned our Company, competitively and strategically. However, as Will Rogers once said, “Even if you’re on the right track, you’ll get run over if you just sit there.” We happen to agree, so we remain aggressive in our drive to serve more home improvement customers every day, even as we continue to develop a number of key strategies for longer-term growth. INDUSTRY TRENDS PROVIDE ATTRACTIVE OPPORTUNITIES The U.S. home improvement industry continues to grow, as new and existing home sales reach record levels, home ownership rates increase, and existing houses and their owners age. In addition, the quality of home life has become more important to many homeowners, prompting them to make improvements or enhancements to kitchens, bathrooms and other frequently used rooms. All of these things spell opportunity for The Home Depot. We intend to capture these opportunities in new and existing Home Depot stores, which will continue to drive consistent sales and earnings growth for the foreseeable future. Longer-term, increasing our sales in other segments of the industry will become progressively more important to supporting a consistent growth pattern. Therefore, we are making plans and taking action today to ensure strong future growth. ARTHUR M. BLANK President and Chief Executive Officer

LONG-TERM GROWTH PLANNING CONTINUES

Let me give you a few examples. Our EXPO Design Center division is beginning its aggressive store growth program. When you see where we have taken the EXPO format in the last year, I think you’ll agree there’s no other retailing concept that comes close to matching its product and service offerings, or capturing its look, feel and excitement. EXPO will allow us to gain a larger share of the home decor market and provide an alternative to Home Depot shoppers whose remodeling preferences sometimes go beyond a Home Depot store. We’re also taking steps to increase our share of the professional business customer market. In some respects, this has been a balancing act for us, since do-it-yourself customers are still our most important customers, and we are committed to continuing to serve their needs. However, we are also focusing on gaining more sales from the pros already shopping in our stores. As we refine the tests we are conducting today and expand our professional programs to more stores, we expect this customer segment will drive incremental sales.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/letterto.html (2 of 5) [4/18/2001 5:55:42 PM]

To Shareholders

I am particularly proud of our accomplishments during fiscal 1998 in taking The Home Depot to customers outside North America. During the year, we opened two stores in Santiago, Chile, and one in San Juan, Puerto Rico. Our experiences so far in both markets are offering encouragement for future success in global retailing. Every day we learn more about serving the diverse needs of customers in other areas of the world. We are also learning that The Home Depot culture is, indeed, transferable, and customer service is valued around the world. It was a thrill for me to see our Chilean and Puerto Rican associates embrace The Home Depot culture of high levels of customer service and respect for each other, and it took me back to the early days of our Company, experiencing the excitement of opening our first stores and watching our dreams turn into successful realities. These lessons will prepare us for the future growth we are planning initially in Latin America and, ultimately, in other areas of the world. ALTERNATE DISTRIBUTION METHODS ATTRACT NEW CUSTOMERS Our long-term plans also address alternative methods of distribution to attract more customers, enhance their shopping experiences and obtain a larger share of the total market. Through our acquisition of Maintenance Warehouse in 1997, we’ve learned how to serve the property maintenance and repair market through direct mail distribution. We’re now beginning to leverage Maintenance Warehouse’s business expertise with The Home Depot brand and capabilities, which is resulting in more aggressive sales growth at Maintenance Warehouse, the pursuit of new target markets and steps toward a more seamless integration of the two companies. We’re also strengthening our telephone sales and special order capabilities through The Home Special Order Center. Currently in test mode, the center was created during fiscal 1998 by National and Wallpaper, Inc., also a Home Depot subsidiary, and it is dramatically simplifying the special process for window coverings and wallpaper in the Home Depot stores participating in the test. The process is faster and more accurate, adding value to the customer shopping experience and allowing our associates to serve more customers. In addition, we’re venturing further into cyberspace. Our Internet home page is undergoing a major content transformation that will reflect our industry leadership position. It will also provide the platform for e-commerce plans later this year. As we implement our Internet strategy, we are focusing on three key areas. The first is to use the interactive capabilities of the Internet to learn more about our customers. This will allow us to respond more quickly to their needs and enhance their shopping experiences in our stores. The second focus is to use our Web page as an educational tool for our customers. We expect these two focus areas to drive additional sales in our stores. The third focus area – selling products on the Internet – has the mind-boggling potential to put a Home Depot “store” within reach of customers around the world. Most retailers, including The Home Depot, are just scratching the surface with the Internet. With more and more homes becoming Internet-enabled each year, this medium is destined to develop into a much more important brand-building and sales vehicle going forward. Bernie and I are tremendously proud of where The Home Depot is today, and especially of how we got here – through an unwavering commitment to four key constituencies: our stockholders, customers, associates and communities. From the beginning, these groups have been the corners of the foundation upon which we have built strong and lasting relationships and a pattern of consistently strong earnings growth. Because of these corners, the foundation is solid enough to keep building. Our long-term plans reach broadly and deeply into the industry, but they are all threads that weave into our vision of providing total solutions for our customers – offering the right products and services at the right price, when they want them; how they want them; and where they want them. We believe that, by doing business on the customers’ terms, we will continue to enhance our leadership position in the industry. LEADERSHIP ENTAILS RESPONSIBILITY But leadership is not just measured by sales and profits – it also entails certain responsibilities. These responsibilities begin with our associates and extend to the communities we serve and the environment in which we live. One of my primary responsibilities as CEO is the development of our people. Life has taught me that if you Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/letterto.html (3 of 5) [4/18/2001 5:55:42 PM]

To Shareholders

surround yourself with people who are different from yourself, your life is enriched. We are enriching our organization through our recruiting, succession planning, and training and development programs. As we extend our reach into the various segments of the home improvement industry, we will be serving a more diverse group of customers with a wide variety of needs for products and services. This dictates a broader skill set in our organization. We’re building an organization that begins with our most talented and experienced management to continue core Home Depot growth and draws from talent pools internally and externally to lead other growth initiatives. As a result of the organizational changes we made in fiscal 1998, we now have greater expertise in areas such as global operations, mergers and acquisitions, imports, logistics, credit, direct-to-customer businesses and decor merchandising. Our capabilities in these areas will be important to our future. It is a business imperative to build a workforce composition that reflects the customers and communities we serve. For this reason, we continue to hire the majority of associates for new stores from the local community. But that’s just the beginning. We have an ongoing commitment to our associates to train, nurture and provide opportunities for professional growth. Associates at every level who combine this with a personal drive to succeed know the power of the formula. These are the leaders who will take The Home Depot to its next level. Giving back to our communities is not only a responsibility, it is part of doing business at The Home Depot. Through many corporate giving programs, we strive to have a positive influence on today’s youth and to make housing more affordable. In addition, countless and tireless hours are volunteered every year by Team Depot SM representatives in all our stores, who offer their own time on worthwhile projects of their choice. We’re also taking a leadership role in protecting the environment. I am personally committed to ensuring that The Home Depot continues to be at the forefront in attacking sustainable forestry and certification issues. As part of this, we have formed an Executive Environmental Council, whose members are responsible and accountable for integrating environmental planning within every part of the Company. The Council recently strengthened and formalized our own forestry policies, and we’re partnering with our suppliers to gain their support. How we treat the environment is an issue of values. As a values-based company, we are sustaining and preserving both our business and our environment. Preserving the environment is one area where we are willing to share the leadership position. There’s plenty of room at the top, and the only way to make a meaningful difference is to gain the support, wisdom and foresight of the suppliers and other retailers in our industry. Similar to the teamwork we employ in our community efforts, by working together we can have a greater impact in making our world a better place. As the events of fiscal 1998 demonstrate, we’re working very hard to continue delivering “the same old stuff” to our stockholders. We see nothing on the horizon that would prevent us from accomplishing this; but, rather than predicting the future, we are focusing on building our future. We’re grateful for your continuing support and proud to be rewarding you for it.

Arthur M. Blank President & Chief Executive Officer March 12, 1999

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/letterto.html (4 of 5) [4/18/2001 5:55:42 PM]

To Shareholders

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/letterto.html (5 of 5) [4/18/2001 5:55:42 PM]

I'm a loyal Home Depot customer and a long-time RIDGID tool user. So, when The Home Depot and RIDGID teamed up, it was only natural that I buy the entire new line of woodworking tools for my workshop. The RIDGID lifetime warranty and my trust in The Home Depot made it an easy decision. JAMES HILBUN DALLAS, GEORGIA

From products at low everyday prices to the services that make us a more convenient and desirable place to shop, The Home Depot has one goal in mind: serving our customers’ needs market by market, store by store. One of the ways we accomplish this goal is by taking a decentralized approach to our merchandising and store operations. This approach allows divisional merchants and managers to spend more time in the stores listening to customers and associates and making decisions that respond more quickly to the unique needs of their markets. At the same time, national product merchants develop core merchandising strategies, negotiating with and developing vendor partners for products sold in all our stores. Working with merchants in the divisions, this group also conducts continuous reviews of products and prices to ensure we are carrying the right assortments, buying at the lowest costs and offering a value to our customers.

PROPRIETARY BRANDS – products developed by and sold only at The Home Depot – supplement our nationally branded products in many categories. During fiscal 1998, we introduced three hot new product lines, which are rapidly growing The Home Depot’s presence in key product categories. A new line of RIDGID® bench top and stationary power tools, in addition to RIDGID wet/dry vacuums and air filtration systems, appeals to pros and do-it-yourself woodworking enthusiasts. In addition, the Company joined forces with John Deere® for the manufacturing and servicing of Scotts ® lawn tractors. Late in the year, The Home Depot began offering GE SmartWater™ water heaters and softeners, with added features and extended warranties.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/1business_ovr.html (1 of 2) [4/18/2001 5:55:55 PM]

Proprietary brands are an important tool for setting The Home Depot apart from the competition and providing customers with quality products at value prices. In addition to these merchandising activities, The Home Depot is responding to our customers’ changing needs in a variety of new and exciting ways. Read on to see what we’ve already done and where we’re headed.

Back

Next

Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/1business_ovr.html (2 of 2) [4/18/2001 5:55:55 PM]

DIRECT TO THE CUSTOMER Doing business on the customers’ terms is an everyday commitment at The Home Depot subsidiaries National Blinds and Wallpaper, and Maintenance Warehouse. The Home Depot Special Order Center, operated by National Blinds and Wallpaper, is making it more convenient than ever for Home Depot customers to order custom window blinds and wallpaper products. Through a new program being tested in a number of stores, customers can complete orders for these products in less than half the time it previously took. At Maintenance Warehouse, national account managers, field sales representatives and telephone sales associates are teaming up to build and strengthen primary supplier relationships with property maintenance managers. This direct-mail distributor of maintenance and repair products is also reaching out to new customers in additional segments of its market.

THE RIGHT TOOLS FOR THE JOB Do-it-yourself and professional customers now have the option to rent up to 200 tools to complete one-time projects, or just to try a tool out before purchasing it. Tool rental centers were in 46 Home Depot stores at the end of fiscal 1998, and we plan to add more tool rental centers to new and existing stores during fiscal 1999. This service enters The Home Depot into a nearly $20 billion highly fragmented market.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/2innovation.html (1 of 2) [4/18/2001 5:56:01 PM]

BACK TO SCHOOL The Home Depot is instilling the do-it-yourself ethic today in its future customers. Our Kids Workshops SM , held in every store, encourage creativity and self-reliance in youngsters, while also teaching tool safety skills. Over two million children have participated in the program since its inception in late 1997. And, just in case the parents need more help, Home Depot University SM is ready for enrollment. Designed to take customers a step beyond weekly How-To Clinics in our stores, Home Depot University is a comprehensive four-week program, which focuses on broad home improvement topics such as room enhancements, kitchens or bathrooms. Home Depot University is expected to be available in most Home Depot stores by mid-1999.

HELPING HANDS If you prefer not to do it yourself, or you’re just too busy, The Home Depot will do it for you. The Company continues to enhance its installed sales programs, most recently through At-Home Services, a roofing, vinyl siding and replacement window installation program, which is currently available in a number of markets across North America, and is expected to expand to additional markets in the future. At-Home Services, as well as other installation services available in all Home Depot stores, is part of the Company’s efforts to respond to changing customer needs and demographics.

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/2innovation.html (2 of 2) [4/18/2001 5:56:01 PM]

EXPO helped make our new home our dream home. Their design experts offered valuable advice and stayed with us through the entire decor process. In sum, EXPO made a huge undertaking an easy and pleasant experience. PAM MONIZ ATLANTA, GEORGIA

The Home Depot is developing long-term plans and strategies that encompass a broad view of the home improvement industry. This view of the industry includes all sales of home improvement and other housing and building-related products for new and existing homes. Totaling over $365 billion annually, our industry provides many exciting opportunities for long-term growth, a number of which have been identified and targeted. We also continue to explore additional growth opportunities, which will allow us to further extend our pattern of steady sales and earnings growth. All of The Home Depot’s long-term growth initiatives are framed by a set of specific objectives. First, our growth initiatives must be based on The Home Depot’s core competencies. Second, the initiatives must generate synergies with our existing business, either by having a positive impact on our core do-it-yourself business or by increasing our share of the professional customer market. Finally, they must pass the rigorous test of supporting the Company’s return on invested capital. Consistent with previous strategies, we prefer to test new ideas and initiatives before implementing them companywide. This approach is not only prudent for our stockholders, but it allows us to refine new programs as we learn more about them. As a result, by the time a new initiative is introduced across the Company, we have demonstrated its ability to enhance sales and earnings. EXPO DESIGN CENTER IS READY TO GROW A good example of this approach is the EXPO Design Center division, which is now poised for rapid growth after seven years in development. Over the years, EXPO has refined its focus to serve primarily customers undergoing major renovation or remodeling projects. EXPO offers products and design, installation and coordination services under one roof, making the remodeling experience more convenient and satisfying to customers. EXPO was operating eight stores at the end of fiscal 1998 and expects to grow to approximately 200 stores over the next five to seven years. In addition to EXPO, a number of other long-term growth initiatives or tests are in progress. These initiatives, as detailed on the next pages, address various segments of our industry, as well as new ways to serve our Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/3do_itall.html (1 of 2) [4/18/2001 5:56:07 PM]

customers.

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/3do_itall.html (2 of 2) [4/18/2001 5:56:07 PM]

NEW HORIZONS The Home Depot began implementing its global retailing strategy during fiscal 1998, opening two stores in Santiago, Chile, and one store in San Juan, Puerto Rico. These stores represent the first steps in a long-term commitment to serve new customers outside North America. We plan to open two more stores in Chile and one more in Puerto Rico in fiscal 1999, and we have targeted Argentina as our next focus area, with plans to open our first store in Buenos Aires in fiscal 2000.

NEW CUSTOMERS The professional business customer market is a key part of The Home Depot’s near- and long-term growth strategies. We continue to strengthen product offerings for pro customers in all our stores, responding to their preferences, as well as their needs for larger quantities. In addition, we are making progress in fine-tuning a test designed to increase professional customer sales through customized services, such as enhanced ordering programs and same-day deliveries, and more individualized attention. Results to-date from this test indicate there are significant opportunities to gain more sales from the pros shopping in our stores.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/4customers.html (1 of 3) [4/18/2001 5:56:14 PM]

NEW FORMATS The newest of our tests, Villager’s Hardware SM plans to open its first test stores in New Jersey during fiscal 1999. The Villager’s Hardware format will test the best products and methods for gaining market share in the $50 billion hardware convenience market, a home improvement segment whose customers tend to be doing smaller fix-it projects and prefer convenient store locations with quick in-and-out service. The Home Depot has a very small piece of this business today. This test will help us to better understand the needs of this segment of the market and to develop a format that will allow us to leverage the Home Depot brand and reputation to serve new customers.

NEW TECHNOLOGY The Internet provides many exciting opportunities to get to know our customers better and increase sales both in our stores and through e-commerce. Late in fiscal 1998, we introduced HomeMinder® , a free Internet-based home improvement reminder service, to our Web page. HomeMinder delivers to subscribers customized information and reminders for home and lawn maintenance and improvements. It is also allowing us to learn more about our customers and their product and service preferences, which will aid in increasing sales in our stores. Other plans for Web page content and interactive capabilities are in progress, and we also have plans to add e-commerce to our Internet capabilities later in fiscal 1999.

Back

Next

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/4customers.html (2 of 3) [4/18/2001 5:56:14 PM]

Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/4customers.html (3 of 3) [4/18/2001 5:56:14 PM]

Nowadays, it’s hard to think of home improvement without thinking of The Home Depot. The Company’s growth, coupled with the trusting relationship we develop with each customer, has resulted in The Home Depot becoming a powerful brand.

WHAT IS THE HOME DEPOT BRAND?

IT'S OUR PEOPLE In the retailing business, the customer shopping experience – the products, the environment and the service – determines a retailer’s success or failure. In the home improvement retailing business, the service element becomes even more critical, since many of our customers walk in with a problem without knowing the solution, or with a dream not knowing if they can make it a reality. Therefore, our associates are the links that hold the shopping experience together, and the high level of service they deliver to our Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/5brand.html (1 of 2) [4/18/2001 5:56:20 PM]

customers sets us apart from the competition. We firmly believe that the home improvement business is much more a feel-good business than a look-good business, and our associates prove it every day by providing answers, solving problems and making home improvement dreams come true. IT' S OUR CULTURE Underlying our strong customer service ethic is a set of core values that make up our culture. The values center on respect for our fellow associates, our customers and our communities. This, in turn, fosters an entrepreneurial spirit, which allows our associates to take ownership for their pieces of the business and makes it easier for them to respond more quickly to our customers’ needs. Our associates live the culture every day, not just because they understand its importance to our past and future successes, but because they believe in it. IT' S OUR REPUTATION Put it all together – Home Depot associates, a strong company culture and a positive shopping experience – and you’ve got a reputation for leadership and excellence in the home improvement industry. In building on this reputation externally, The Home Depot strives to associate itself with partners whose values or goals closely match our own. Our sponsorships of the United States, Canadian and Puerto Rican Olympic teams link us with groups whose spirit and philosophies mirror our dedication to teamwork and excellence. In addition, our status as the Official Home Improvement Warehouse of NASCAR® , as well as our partnership with Joe Gibbs Racing® , teams us up with the fastest growing sport in the United States. Through these and other associations, we can continue to build the brand and extend our reach to more home improvement customers. It’s just one more way to enhance our leadership position in the industry.

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/5brand.html (2 of 2) [4/18/2001 5:56:20 PM]

TO OUR COMMUNITIES Contributing to the growth and well-being of our communities is a vital part of our business and a responsibility we take very seriously. In striving to be a respected neighbor, we contribute to the local economy and use our volunteer skills to improve the lives of those around us. Building KaBoom! SM playgrounds is a favorite of Team Depot volunteers, because it allows them to roll up their sleeves and help local residents build safe and creative play areas for children. In addition, through our national partnership with YouthBuild® , we teach at-risk youth how to rehabilitate housing for low-income families in dozens of cities across North America. Learning the benefits of a valuable hands-on trade will ultimately lead to employment and economic freedom for any of these young adults – and perhaps a career with The Home Depot.

TO OUR ENVIRONMENT The Home Depot is committed to a leadership position in environmental excellence. We are currently working with the Certified Forest Products Council to chart a comprehensive policy aimed at increasing the sale and use of third-party certified forest products. As the first retailer to pioneer certified wood products in the U.S. market, we know that environmental initiatives will only succeed if we have the cooperation of our suppliers, associates, customers and the public. We will further develop these partnerships as we work toward a viable economic and environmental balance.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/6reach_out.html (1 of 2) [4/18/2001 5:56:27 PM]

TO OUR PEOPLE The Home Depot associates are talented men and women who represent many cultures, races, ages and physical abilities – all working together to take care of our customers. Our Company is committed to fostering an environment in which every associate feels that their contributions are meaningful, that their jobs are rewarding and that there are no boundaries to professional success. To prepare associates for future opportunities, the Company has numerous training and development programs, as well as policies and procedures to ensure equal opportunities are available to all of our people. In filling the hundreds of positions created each week, we strive to make sure our talented associate pool is reflective of the communities we serve, whether they are in the United States, Canada, Chile or Puerto Rico. For more information regarding our community, environmental and human resources programs, call Community Affairs at 770.433.8211 for a free copy of our social responsibility report, or see it online at http://www.homedepot.com.

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/6reach_out.html (2 of 2) [4/18/2001 5:56:27 PM]

WE SERVE NEW CUSTOMERS ONE APRON AT A TIME!

THE HOME DEPOT plans to open new stores at a consistent 21-22% rate for the foreseeable future. We currently expect to be operating over 1,600 stores by the end of fiscal 2002.

* Based on current forecasts

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/7serve.html (1 of 2) [4/18/2001 5:56:31 PM]

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/7serve.html (2 of 2) [4/18/2001 5:56:31 PM]

Management's Discussion and Analysis

MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THE HOME DEPOT, INC. AND SUBSIDIARIES The data below reflect selected sales data, the percentage relationship between sales and major categories in the Consolidated Statements of Earnings and the percentage change in the dollar amounts of each of the items.

(1) Fiscal years 1998, 1997 and 1996 refer to the fiscal years ended January 31, 1999; February 1, 1998; and February 2, 1997, respectively. (2) Minority interest has been reclassified to selling and store operating expenses. (3) Not meaningful. (4) Adjusted to reflect the first 52 weeks of the 53-week fiscal year in 1996. FORWARD-LOOKING STATEMENTS Certain written and oral statements made by The Home Depot, Inc. and subsidiaries (the “Company”) or with the approval of an authorized executive officer of the Company may constitute “forward-looking statements” as defined under the Private Securities Litigation Reform Act of 1995. Words or phrases such as “should result,” “are expected to,” “we anticipate,” “we estimate,” “we project” or similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and its present expectations or projections.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/manage1.html (1 of 6) [4/18/2001 5:56:36 PM]

Management's Discussion and Analysis

These risks and uncertainties include, but are not limited to, unanticipated weather conditions, stability of costs and availability of sourcing channels, conditions affecting the acquisition, development and ownership of real estate, year 2000 problems and the impact of competition. Caution should be taken not to place undue reliance on any such forward-looking statements, since such statements speak only as of the date of the making of such statements. Additional information concerning these risks and uncertainties is contained in the Company’s filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form10-K. RESULTS OF OPERATIONS For an understanding of the significant factors that influenced the Company’s performance during the past three fiscal years, the following discussion should be read in conjunction with the consolidated financial statements presented in this annual report. Fiscal year ended January 31, 1999 compared to February 1, 1998 Net sales for fiscal 1998 increased 25.1% to $30.2 billion from $24.2 billion in fiscal 1997. This increase was attributable to, among other things, full year sales from the 112 new stores opened during fiscal 1997, a 7% comparable store-for-store sales increase, and 138 new store openings and 4 store relocations during fiscal 1998. One store opened during fiscal 1998 was subsequently closed during the year and is planned to reopen during fiscal 1999. Gross profit as a percent of sales was 28.5% for fiscal 1998 compared to 28.1% for fiscal 1997. The rate increase was primarily attributable to a lower cost of merchandise resulting from product line reviews and other merchandising initiatives begun in fiscal 1996 and continued through fiscal 1997 and 1998. In addition, sales mix changes, better inventory shrink results, and benefits from import strategies contributed to the overall gross profit improvement. Operating expenses as a percent of sales were 19.7% for fiscal 1998 compared to 20.2% for fiscal 1997. Operating expenses for fiscal 1997 included a $104 million non-recurring charge related to the settlements of a class action gender discrimination lawsuit and three other gender discrimination lawsuits. Excluding the non-recurring charge, operating expenses as a percent of sales were 19.8% for fiscal 1997. Selling and store operating expenses as a percent of sales decreased to 17.7% in fiscal 1998 from 17.8% in fiscal 1997. The decrease was primarily attributable to lower net advertising expenses resulting from higher cooperative advertising participation by vendors, increased use of national advertising, and leverage achieved from opening stores in existing markets. In addition, improved claims management and focus on safety programs resulted in lower workers’ compensation and general liability claims experience as a percent of sales. Also, minority interest decreased from fiscal 1997, mainly due to the purchase of the remaining 25% of The Home Depot Canada partnership from The Molson Companies during the first quarter of fiscal 1998. Partially offsetting these decreases were higher medical costs from increased family enrollment in the Company’s medical plans and higher store selling payroll expenses as a percent of sales. The increase in store selling payroll expenses was primarily due to increased sales penetrations in higher margin decor categories, which require more hours and higher average pay rates to support. Overall productivity, in terms of sales per labor hour, increased from fiscal 1997. Pre-opening expenses as a percent of sales were 0.3% for both fiscal 1998 and 1997. The Company opened 138 new stores and relocated 4 stores in fiscal 1998, and opened 112 new stores and relocated 5 stores in fiscal 1997. Pre-opening expenses averaged $618,000 per store in fiscal 1998 compared to $559,000 per store in fiscal 1997. The higher average expense resulted primarily from the Company’s initial entry into markets such as Chile, Puerto Rico and Alaska, which involve longer pre-opening periods and higher travel and relocation costs. General and administrative expenses as a percent of sales were 1.7% for both fiscal 1998 and 1997. Incremental expenses related to long-term growth and business planning initiatives incurred in fiscal 1998 were offset by efficiencies realized from increased sales. Interest and investment income as a percent of sales decreased to 0.1% in fiscal 1998 from 0.2% in fiscal 1997 due to lower investment balances and lower interest rates. Interest expense as a percent of sales was 0.1% in fiscal 1998 compared to 0.2% in fiscal 1997. The decrease from fiscal 1997 was primarily attributable to economies realized from a 25.1% increase in sales for fiscal 1998 and higher capitalized interest resulting from a higher percentage of owned stores under construction. Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/manage1.html (2 of 6) [4/18/2001 5:56:36 PM]

Management's Discussion and Analysis

The Company’s combined federal and state effective income tax rate was 39.2% for fiscal 1998 compared to 38.9% for fiscal 1997. The increase was due to a reduction in tax-exempt interest income as investment balances declined during the year and to higher effective state tax rates. Net earnings as a percent of sales were 5.3% for fiscal 1998 compared to 4.8% for fiscal 1997, reflecting a higher gross profit rate, lower selling and store operating expenses as a percent of sales and the non-recurring charge recorded in fiscal 1997. Diluted earnings per share were $1.06 for fiscal 1998 compared to $0.78 for fiscal 1997. Excluding the non-recurring charge, diluted earnings per share were $0.82 for fiscal 1997. Fiscal year ended February 1, 1 998 compared to February 2, 1997 Fiscal 1997 consisted of 52 weeks compared to 53 weeks in fiscal 1996. Net sales for fiscal 1997 increased 23.7% to $24.2 billion from $19.5 billion in fiscal 1996. The increase was attributable to, among other things, full year sales from the 89 new stores opened during fiscal 1996, a 7% comparable 52-week store-for-store sales increase, and 112 new store openings and 5 store relocations during fiscal 1997. The percentage increase in sales was negatively impacted by one less week of sales in fiscal 1997 versus fiscal 1996. Gross profit as a percent of sales was 28.1% for fiscal 1997 compared to 27.8% for fiscal 1996. The rate increase was primarily attributable to a lower cost of merchandise resulting from product line reviews and other merchandising initiatives begun in fiscal 1996 and continued through fiscal 1997. In addition, lower and more stable lumber costs, sales mix changes, and better inventory shrink results contributed to the gross profit improvement. Operating expenses as a percent of sales were 20.2% for fiscal 1997 compared to 20.0% for fiscal 1996. Operating expenses for fiscal 1997 included a $104 million non-recurring charge related to the settlements of a class action gender discrimination lawsuit and three other gender discrimination lawsuits. The non-recurring charge included $65 million for the plaintiff class members, $22.5 million for the plaintiffs’ attorneys and approximately $17 million for other related internal costs, including implementation or enhancement of certain human resources programs, as well as the settlement terms of the three other lawsuits. Excluding the non-recurring charge, operating expenses as a percent of sales were 19.8% for fiscal 1997. Selling and store operating expenses as a percent of sales decreased to 17.8% in fiscal 1997 from 18.0% in fiscal 1996. The decrease was primarily attributable to lower net advertising expenses resulting from higher cooperative advertising participation by vendors and increased use of national advertising, as well as lower medical insurance costs primarily due to a higher percentage of the Company’s associates using in-network providers. Partially offsetting these decreases were higher store payroll expenses as a percent of sales, mainly due to increased focus on certain higher margin merchandising categories that require more labor hours to support, such as flooring and other decor areas. Pre-opening expenses as a percent of sales were 0.3% for both fiscal 1997 and 1996. The Company opened 112 new stores and relocated 5 stores in fiscal 1997, and opened 89 new stores and relocated 7 stores in fiscal 1996. Pre-opening expenses averaged $559,000 per store in fiscal 1997 compared to $570,000 per store in fiscal 1996. General and administrative expenses as a percent of sales were 1.7% for both fiscal 1997 and 1996. Incremental expenses related to long-term growth and business planning initiatives incurred in fiscal 1997 were partially offset by efficiencies realized from increased sales. Interest and investment income as a percent of sales increased to 0.2% in fiscal 1997 from 0.1% in fiscal 1996 due to a full year of investment income earned in fiscal 1997 from the proceeds of the issuance of $1.1 billion of the Company’s 3 1/4 % Convertible Subordinated Notes (“3 1/4 % Notes”) in October 1996 (see “Liquidity and Capital Resources”). Interest expense as a percent of sales was 0.2% in fiscal 1997 compared to 0% in fiscal 1996. The increase from the prior year was primarily attributable to a full year of interest expense on the 3 1/4 % Notes in fiscal 1997, compared to a partial year of interest expense on the 3 1/4 % Notes and lower levels of long-term debt prior to issuance of the 3 1/4 % Notes in fiscal 1996. The Company’s combined federal and state effective income tax rate was 38.9% for both fiscal 1997 and 1996. Net earnings as a percent of sales were 4.8% for both fiscal 1997 and 1996, reflecting a higher gross profit Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/manage1.html (3 of 6) [4/18/2001 5:56:36 PM]

Management's Discussion and Analysis

percentage and lower selling and store operating expenses as a percent of sales, offset by the non-recurring charge recorded during fiscal 1997, as described above. Diluted earnings per share were $0.78 for fiscal 1997 compared to $0.65 for fiscal 1996. Excluding the non-recurring charge, diluted earnings per share were $0.82 for fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES Cash flow generated from store operations provides the Company with a significant source of liquidity. Additionally, a significant portion of the Company’s inventory is financed under vendor credit terms. The Company plans to open approximately 167 new stores and relocate 8 existing stores during fiscal 1999. It is anticipated that approximately 84% of these locations will be owned, and the remainder will be leased. The Company also plans to open approximately 200 stores, including relocations, in fiscal 2000. During the last three fiscal years, the Company entered into two operating lease agreements totaling $882 million for the purpose of financing construction costs of certain new stores. Under the operating lease agreements, the lessor purchases the properties, pays for the construction costs and subsequently leases the facilities to the Company. The leases provide for substantial residual value guarantees and include purchase options at original cost on each property. The Company financed a portion of its new stores in fiscal 1997 and 1998 under the operating lease agreements and anticipates utilizing these facilities to finance selected new stores in fiscal 1999 and 2000 and an office building in fiscal 1999. In addition, some locations for fiscal 1999 will be leased individually. The cost of new stores to be constructed and owned by the Company varies widely, principally due to land costs, and is currently estimated to average approximately $12.9 million per location. The cost to remodel and/or fixture stores to be leased is expected to average approximately $3.2 million per store. In addition, each new store will require approximately $3.1 million to finance inventories, net of vendor financing. During fiscal 1996, the Company issued, through a public offering, $1.1 billion of 3 1/4 % Convertible Subordinated Notes due October 1, 2001. The 3 1/4 % Notes were issued at par and are convertible into shares of the Company’s common stock at any time prior to maturity, unless previously redeemed by the Company, at a conversion price of $23.0417 per share, subject to adjustment under certain conditions. The 3 1/4 % Notes may be redeemed by the Company at any time on or after October 2, 1999, in whole or in part, at a redemption price of 100.813% of the principal amount and after October 1, 2000, at 100% of the principal amount. The Company used the net proceeds from the offering to repay outstanding commercial paper obligations, to finance a portion of the Company’s capital expenditure program, including store expansions and renovations, and for general corporate purposes. The Company has a commercial paper program that allows borrowings up to a maximum of $800 million. As of January 31, 1999, there was $246 million outstanding under the program. In connection with the program, the Company has a backup credit facility with a consortium of banks for up to $800 million. The credit facility, which expires in December 2000, contains various restrictive covenants, none of which is expected to impact the Company’s liquidity or capital resources. As of January 31, 1999, the Company had $62 million in cash and cash equivalents. Management believes that its current cash position, internally generated funds, funds available from its $800 million commercial paper program, funds available from the operating lease agreements, and the ability to obtain alternate sources of financing should enable the Company to complete its capital expenditure programs, including store openings and renovations, through the next several fiscal years. YEAR 2000 The Company is currently addressing a universal situation commonly referred to as the “Year 2000 Problem.” The Year 2000 Problem relates to the inability of certain computer software programs to properly recognize and process date-sensitive information relative to the year 2000 and beyond. During fiscal 1997, the Company developed a plan to devote the necessary resources to identify and modify internal systems impacted by the Year 2000 Problem, or implement new systems to become year 2000 compliant in a timely manner. This compliance plan consists of four major areas of focus: systems, desktops, facilities and supplier management. The total cost of Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/manage1.html (4 of 6) [4/18/2001 5:56:36 PM]

Management's Discussion and Analysis

executing this plan is estimated at $13 million, and as of January 31, 1999, the Company had expended approximately $8.75 million to effect the plan. The Company has completed the initial phases of the systems portion of the compliance plan. The initial phases included completing an inventory of all software programs operating on Company systems and identifying year 2000 problems. The next phase involved creating an appropriate testing environment, and as of January 31, 1999, this phase was substantially complete. Subsequent phases of the systems portion of the compliance plan involve testing and installing year 2000 compliant software in the production environment, which were approximately 95% and 80% complete, respectively, at the end of fiscal 1998. The Company anticipates substantially completing the systems portion of its compliance plan by the end of the first quarter of fiscal 1999. All desktop applications critical to the Company’s overall business have been inventoried and evaluated under the method described above, and as of January 31, 1999, this process was complete. Desktop infrastructure is also being tested and is expected to be substantially complete during the first quarter of fiscal 1999. Substantially all critical facilities systems, including, but not limited to, security systems, energy management, material handling, copiers and faxes, have been inventoried and are being tested. As of January 31, 1999, this process was approximately 60% complete. The Company anticipates completing the facilities systems portion of its compliance plan before the end of the second quarter of fiscal 1999. The Company is assessing the year 2000 compliance status of its suppliers, many of which participate in electronic data interchange (“EDI”) or similar programs with the Company. The Company anticipates conducting substantial testing with EDI merchandise suppliers during 1999. In addition, the Company plans to communicate with all its transportation carriers and to conduct similar testing. With respect to merchandise suppliers participating in EDI programs with the Company, the Company anticipates conducting point-to-point testing of these EDI systems for year 2000 compliance. The Company’s risks involved with not solving the Year 2000 Problem include, but are not limited to, the following: loss of local or regional electrical power, loss of telecommunication services, delays or cancellations of merchandise shipments, manufacturing shutdowns, delays in processing customer transactions, bank errors and computer errors by suppliers. Because the Company’s year 2000 compliance is dependent upon certain third parties (including infra-structure providers) also being year 2000 compliant on a timely basis, there can be no assurance that the Company’s efforts will prevent a material adverse impact on its results of operations, financial condition or business. The Company is modifying its existing disaster recovery plans to include year 2000 contingency planning. Also, the Company is identifying critical activities that would normally be conducted during the first two weeks of January 2000, which may be completed instead in December 1999. The Company expects its year 2000 contingency planning to be substantially complete by the end of the second quarter of fiscal 1999, and to test and modify contingency plans throughout the remainder of 1999. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not entered into any transactions using derivative financial instruments or derivative commodity instruments and believes that its exposure to market risk associated with other financial instruments (such as investments) and interest rate risk is not material. IMPACT OF INFLATION AND CHANGING PRICES Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on sales or results of operations. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” effective for all fiscal quarters of fiscal years beginning after June 15, 1999.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/manage1.html (5 of 6) [4/18/2001 5:56:36 PM]

Management's Discussion and Analysis

SFAS 133 requires all derivatives to be carried on the balance sheet at fair value. Changes in the fair value of derivatives must be recognized in the Company’s Consolidated Statements of Earnings when they occur; however, there is an exception for derivatives that qualify as hedges as defined by SFAS 133. If a derivative qualifies as a hedge, a company can elect to use “hedge accounting” to eliminate or reduce the income statement volatility that would arise from reporting changes in a derivative’s fair value. Adoption of SFAS 133 is not expected to materially impact the Company’s reported financial results.

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/manage1.html (6 of 6) [4/18/2001 5:56:36 PM]

Consolidated Statements of Income

CONSOLIDATED STATEMENTS OF EARNINGS THE HOME DEPOT, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/stat_1earnings.html [4/18/2001 5:56:45 PM]

Consolidated Balance Sheet

CONSOLIDATED BALANCE SHEETS THE HOME DEPOT, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/stat_2bal.html (1 of 2) [4/18/2001 5:56:50 PM]

Consolidated Balance Sheet

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/stat_2bal.html (2 of 2) [4/18/2001 5:56:50 PM]

Consolidated Statement of Stockholders' Equity

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME THE HOME DEPOT, INC. AND SUBSIDIARIES

(1) Componets of comprehensive income are reported net of related taxes. See accompanying notes to consolidated financial statements

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/stat_3equity.html (1 of 2) [4/18/2001 5:56:56 PM]

Consolidated Statement of Stockholders' Equity

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/stat_3equity.html (2 of 2) [4/18/2001 5:56:56 PM]

Consolidated Statement of Cash Flows

CONSOLIDATED STATEMENTS OF CASH FLOWS THE HOME DEPOT, INC. AND SUBSIDIARIES

See accompanying notes to consolidated financial statements

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/stat_4cash.html (1 of 2) [4/18/2001 5:57:01 PM]

Consolidated Statement of Cash Flows

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/stat_4cash.html (2 of 2) [4/18/2001 5:57:01 PM]

Notes To Financial Statements pg1

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE HOME DEPOT, INC. AND SUBSIDIARIES note

1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Home Depot operates full-service, warehouse-style stores averaging approximately 107,000 square feet in size. The stores stock approximately 40,000 to 50,000 different kinds of building materials, home improvement supplies and lawn and garden products that are sold primarily to do-it-yourselfers, but also to home improvement contractors, tradespeople and building maintenance professionals. In addition, the Company operates EXPO Design Center stores, which offer products and services primarily related to design and renovation projects. At the end of fiscal 1998, the Company was operating 761 stores, including 707 Home Depot stores and 8 EXPO Design Center stores in the United States; 43 Home Depot stores in Canada; 2 Home Depot stores in Chile; and 1 Home Depot store in Puerto Rico. Included in the Company’s Consolidated Balance Sheets at January 31, 1999 are $568 million of net assets of the Canadian and Chilean operations. Fiscal Year The Company’s fiscal year is a 52-or 53-week period ending on the Sunday nearest to January 31. Fiscal years 1998 and 1997, which ended January 31, 1999 and February 1, 1998, respectively, consisted of 52 weeks, while fiscal year 1996, which ended February 2, 1997, consisted of 53 weeks. Basis of Presentation The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and its majority-owned partnership. All significant intercompany transactions have been eliminated in consolidation. Stockholders’ equity, share and per share amounts for all periods presented have been adjusted for a two-for-one stock split effected in the form of a stock dividend on July 2, 1998, and a three-for-two stock split effected in the form of a stock dividend on July 3, 1997. Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are primarily cash equivalents carried at fair market value and consist primarily of commercial paper, money market funds, U.S. government agency securities and tax-exempt notes and bonds. Merchandise Inventories Inventories are stated at the lower of cost (first-in, first-out) or market, as determined by the retail inventory method. Income Taxes The Company provides for federal, state and foreign income taxes currently payable, as well as for those deferred because of timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal, state and foreign incentive tax credits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Non-U.S.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes1.html (1 of 8) [4/18/2001 5:57:07 PM]

Notes To Financial Statements pg1

subsidiaries, which are consolidated for financial reporting, are not eligible to be included in consolidated U.S. federal income tax returns, and separate provisions for income taxes have been determined for these entities. The Company intends to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes for non-U.S. subsidiaries was required for any year presented. Depreciation and Amortization The Company’s buildings, furniture, fixtures and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Improvements to leased premises are amortized using the straight-line method over the life of the lease or the useful life of the improvement, whichever is shorter. The Company’s property and equipment is depreciated using the following estimated useful lives:

Cost in Excess of the Fair Value of Net Assets Acquired Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over 40 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining useful life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds. Notes Receivable Notes receivable, which are issued to real estate developers in connection with development and construction of stores and underlying real estate, are recorded at cost less an allowance for impaired notes receivable when necessary. Store Pre-Opening Costs Non-capital expenditures associated with opening new stores are expensed as incurred. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. An impairment is recognized to the extent the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Accordingly, when the Company commits to relocate or close a store, the estimated unrecoverable costs are charged to expense. Such costs include the estimated loss on the sale of land and buildings, the book value of abandoned fixtures, equipment and leasehold improvements, and a provision for the present value of future lease obligations, less estimated sublease income. Stock Compensation The Company has adopted Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.” SFAS 123 encourages the use of a fair-value-based method of accounting for stock-based awards under which the fair value of stock options is determined on the date of grant and expensed over the vesting period. Under SFAS 123, companies may, however, measure compensation costs for those plans using the method prescribed by Accounting Principles Board Opinion No. 25 (“APB No. 25”),

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes1.html (2 of 8) [4/18/2001 5:57:07 PM]

Notes To Financial Statements pg1

“Accounting for Stock Issued to Employees.” Companies that apply APB No. 25 are required to include pro forma disclosures of net earnings and earnings per share as if the fair-value-based method of accounting had been applied. The Company elected to account for such plans under the provisions of APB No. 25. Comprehensive Income Comprehensive income includes net earnings adjusted for certain revenues, expenses, gains and losses that are excluded from net earnings under generally accepted accounting principles. Examples include foreign currency translation adjustments and unrealized gains and losses on investments. Foreign Currency Translation The assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current rate of exchange on the last day of the reporting period, revenues and expenses are translated at the average monthly exchange rates, and all other equity transactions are translated using the actual rate on the day of the transaction. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates. Reclassifications Certain balances in prior fiscal years have been reclassified to conform with the presentation adopted in the current fiscal year. note

2 LONG-TERM DEBT

The Company’s long-term debt at the end of fiscal 1998 and 1997 consisted of the following (amounts in millions):

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes1.html (3 of 8) [4/18/2001 5:57:07 PM]

Notes To Financial Statements pg1

In October 1996, the Company issued, through a public offering, $1.1 billion of 3 1/4 % Convertible Subordinated Notes (“3 1/4 % Notes”) due October 1, 2001. The 3 1/4 % Notes were issued at par and are convertible into shares of common stock at any time prior to maturity, unless previously redeemed by the Company, at a conversion price of $23.0417 per share, subject to adjustment under certain conditions. The 3 1/4 % Notes may be redeemed by the Company at any time on or after October 2, 1999, in whole or in part, at a redemption price of 100.813% of the principal amount and after October 1, 2000, at 100% of the principal amount. The 3 1/4 % Notes are not subject to sinking fund provisions. The Company has an $800 million commercial paper program supported by a back-up credit facility with an available commitment amount of $800 million. The back-up credit facility expires in December 2000. Covenants related to the back-up credit facility place limitations on total Company indebtedness, subsidiary indebtedness and liens. As of January 31, 1999, the Company was in compliance with all restrictive covenants. The restrictive covenants related to letter of credit agreements securing the industrial revenue bonds are no more restrictive than those referenced or described above.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes1.html (4 of 8) [4/18/2001 5:57:07 PM]

Notes To Financial Statements pg1

Interest expense in the accompanying Consolidated Statements of Earnings is net of interest capitalized of $31 million in fiscal 1998, $19 million in fiscal 1997 and $23 million in fiscal 1996. Maturities of long-term debt (excluding the 3 1/4 % Notes) are $14 million for fiscal 1999, $250 million for fiscal 2000, $3 million for fiscal 2001, $19 million for fiscal 2002 and $5 million for fiscal 2003. The estimated fair value of the 3 1/4 % Notes, which are publicly traded, was approximately $2.9 billion based on the market price at January 31, 1999. The estimated fair value of commercial paper borrowings approximate their carrying value. The estimated fair value of all other long-term borrowings was approximately $382 million compared to the carrying value of $231 million. These fair values were estimated using a discounted cash flow analysis based on the Company’s incremental borrowing rate for similar liabilities. note

3 INCOME TAXES

The provision for income taxes consisted of the following (in millions):

The Company’s combined federal, state and foreign effective tax rates for fiscal years 1998, 1997 and 1996, net of offsets generated by federal, state and foreign tax incentive credits, were approximately 39.2%, 38.9% and 38.9%, respectively. A reconciliation of income tax expense at the federal statutory rate of 35% to actual tax expense for the applicable fiscal years follows (in millions):

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of January 31, 1999 and February 1, 1998 were as follows (in millions):

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes1.html (5 of 8) [4/18/2001 5:57:07 PM]

Notes To Financial Statements pg1

No valuation allowance was recorded against the deferred tax assets at January 31, 1999 or February 1, 1998. Company management believes the existing net deductible temporary differences comprising the total gross deferred tax assets will reverse during periods in which the Company generates net taxable income. note

4 EMPLOYEE STOCK PLANS

The 1997 Omnibus Stock Incentive Plan (“1997 Plan”), which is an amendment and restatement of the 1991 Omnibus Stock Option Plan (“1991 Plan”), provides that incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and deferred shares may be issued to selected associates, officers and directors of the Company. The maximum number of shares of the Company’s common stock available for issuance under the 1997 Plan is the lesser of 100 million shares, or the number of shares carried over from prior plans plus one-half percent of the total number of outstanding shares as of the first day of each fiscal year. In addition, restricted shares issued under the 1997 Plan may not exceed 10 million shares. As of January 31, 1999, the maximum shares available for future grants under the 1997 Plan were 85,549,859. Under the 1997 Plan, incentive and non-qualified options for 15,788,234 shares, net of cancellations (of which 17,577 had been exercised), have been granted at prices ranging from $19.17 to $47.88 per share. Incentive stock options vest at the rate of 25% per year commencing on the first anniversary date of the grant and expire on the tenth anniversary date of the grant. The non-qualified options have similar terms; however, vesting does not generally begin until the second anniversary date of the grant. As of January 31, 1999, 108,594 shares of restricted stock were outstanding. The restricted shares vest over varying terms and are generally based on the attainment of certain performance goals. The expected fair value of the restricted shares on the vesting dates will be charged to expense ratably over the vesting periods unless it is determined that the performance goals will not be met. Under the 1991 Plan, which became effective June 1, 1991, options for 52,798,833 shares, net of cancellations (of which 20,881,960 had been exercised), had been granted at prices ranging from $8.17 to $17.79 per share as of January 31, 1999. The 1991 Plan expired on February 28, 1997, and the shares available for grant were carried over to the 1997 Plan. The per share weighted average fair value of stock options granted during fiscal years 1998, 1997 and 1996 was $14.91, $6.30 and $4.62, respectively. These amounts were determined using the Black-Scholes option-pricing model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, expected dividend payments, and the risk-free interest rate over the expected life of the option. The dividend yield was calculated by dividing the current annualized dividend by the option price for each grant. Expected volatility was based on stock prices for the fiscal year the grant occurred and the two previous fiscal years. The risk-free interest rate was the rate available on zero coupon U.S. government issues with a term equal to the remaining term for each grant. The expected life of each

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes1.html (6 of 8) [4/18/2001 5:57:07 PM]

Notes To Financial Statements pg1

option was estimated based on the exercise history from previous grants. The assumptions used in the Black-Scholes model were as follows:

The Company applies APB No. 25 in accounting for its stock plans and, accordingly, no compensation costs have been recognized in the Company’s financial statements for incentive or non-qualified stock options granted. If, under SFAS 123, the Company determined compensation costs based on the fair value at the grant date for its stock options, net earnings and earnings per share would have been reduced to the pro forma amounts below (in millions, except per share data):

The following table summarizes shares outstanding under the various stock option plans at January 31, 1999, February 1, 1998 and February 2, 1997 and changes during the fiscal years ended on these dates (shares in thousands):

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes1.html (7 of 8) [4/18/2001 5:57:07 PM]

Notes To Financial Statements pg1

The average remaining contractual life of the outstanding options as of January 31, 1999 was approximately 7.6 years. In addition, the Company had 7,962,854 shares available for future grants under the Employee Stock Purchase Plan (“ESPP”) at January 31, 1999. The ESPP enables the Company to grant substantially all full-time associates options to purchase up to 66,412,500 shares of common stock, of which 58,449,648 shares have been exercised from inception of the plan, at a price equal to the lower of 85% of the stock’s fair market value on the first day or the last day of the purchase period. Shares purchased may not exceed the lesser of 20% of the associate’s annual compensation, as defined, or $25,000 of common stock at its fair market value (determined at the time such option is granted) for any one calendar year. Associates pay for the shares ratably over a period of one year (the purchase period) through payroll deductions, and cannot exercise their option to purchase any of the shares until the conclusion of the purchase period. In the event an associate elects not to exercise such options, the full amount withheld is refundable. During fiscal 1998, options for 3,669,886 shares were exercised at an average price of $19.27 per share. At January 31, 1999, there were 2,184,525 options outstanding, net of cancellations, at an average price of $31.41 per share.

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes1.html (8 of 8) [4/18/2001 5:57:07 PM]

Notes To Financial Statements pg2

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE HOME DEPOT, INC. AND SUBSIDIARIES note

5 LEASES

The Company leases certain retail locations, office space, warehouse and distribution space, equipment and vehicles. While the majority of the leases are operating leases, certain retail locations are leased under capital leases. As leases expire, it can be expected that in the normal course of business, leases will be renewed or replaced. In June 1996, the Company entered into a $300 million operating lease agreement for the purpose of financing construction costs for selected new stores. The Company increased its available funding under the operating lease agreement to $600 million in May 1997. In October 1998, through a second operating lease agreement, the Company further increased the available funding by $282 million to $882 million. Under the agreements, the lessor purchases the properties, pays for the construction costs and subsequently leases the facilities to the Company. The initial lease term for the $600 million agreement is five years with five 2-year renewal options. The lease term for the $282 million agreement is 10 years with no renewal options. Both lease agreements provide for substantial residual value guarantees and include purchase options at original cost on each property. The Company financed a portion of its new stores in fiscal 1997 and 1998 under the operating lease agreements and anticipates utilizing these facilities to finance selected new stores in fiscal 1999 and 2000 and an office building in fiscal 1999. During 1995, the Company entered into two operating lease agreements under which the Company leases an import distribution facility, including its related equipment, and an office building for store support functions. The initial lease terms are five and seven years, respectively, with five 5-year renewal options for the import distribution facility and one 5-year renewal option for the office building. Both lease agreements provide for substantial residual value guarantees and include purchase options at the higher of the cost or fair market value of the assets for the import distribution facility and at cost for the office building. The maximum amount of the residual value guarantees relative to the assets under the lease agreements described above is projected to be $855 million. As the leased assets are placed into service, the Company estimates its liability under the residual value guarantees and records additional rent expense on a straight-line basis over the remaining lease terms. Total rent expense, net of minor sublease income for the fiscal years ended January 31, 1999, February 1, 1998 and February 2, 1997 was $321 million, $262 million and $219 million, respectively. Real estate taxes, insurance, maintenance, and operating expenses applicable to the leased property are obligations of the Company under the building leases. Certain of the store leases provide for contingent rentals based on percentages of sales in excess of specified minimums. Contingent rentals for the fiscal years ended January 31, 1999, February 1, 1998 and February 2, 1997 were approximately $11 million, $10 million and $10 million, respectively. The approximate future minimum lease payments under capital and operating leases at January 31, 1999 were as follows (in millions):

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes2.html (1 of 5) [4/18/2001 5:57:15 PM]

Notes To Financial Statements pg2

Short-term and long-term obligations for capital leases are included in the Company’s Consolidated Balance Sheets in Current Installments of Long-Term Debt and Long-Term Debt, respectively. The assets under capital leases recorded in Net Property and Equipment, net of amortization, totaled $180 million and $147 million at January 31, 1999 and February 1, 1998, respectively. note

6 EMPLOYEE BENEFIT PLANS

During fiscal 1996, the Company established a defined contribution plan (“401(k)”) pursuant to Section 401(k) of the Internal Revenue Code. The 401(k) covers substantially all associates that meet certain service requirements. The Company makes matching cash contributions, on a weekly basis, up to specified percentages of associates’ contributions as approved by the Board of Directors. During fiscal 1988, the Company established a leveraged Employee Stock Ownership Plan and Trust (“ESOP”) covering substantially all full-time associates. At January 31, 1999, the ESOP held a total of 21,024,649 shares of the Company’s common stock in trust for plan participants’ accounts. The ESOP purchased the shares in the open market with contributions received from the Company in fiscal 1998 and 1997, and from the proceeds of loans obtained from the Company during fiscal 1992, 1990 and 1989 totaling approximately $81 million. All loans payable to the Company in connection with the purchase of such shares have been paid in full. During February 1999, the Company made its final contribution to the ESOP plan and amended its 401(k) plan. In the amendment, the Company elected to increase its percentage contribution to the 401(k) in lieu of future ESOP contributions. The Company adopted a non-qualified ESOP Restoration Plan in fiscal 1994. The Company also made its final contribution to the ESOP Restoration Plan during February 1999 and established a new 401(k) Restoration Plan. The primary purpose of the new plan is to provide certain associates deferred compensation that they would have received under the 401(k) matching contribution if not for the maximum compensation limits under the Internal Revenue Code of 1986, as amended. The Company has established a “rabbi trust” to fund the benefits under the ESOP Restoration Plan. Compensation expense related to this plan for fiscal years 1998, 1997 and 1996 was not material. Funds provided to the trust are primarily used to purchase shares of the Company’s common stock in the open market. The Company’s combined contributions to the 401(k) and ESOP were $41 million, $33 million and $25 million for fiscal years 1998, 1997 and 1996, respectively. note

7 BASIC AND DILUTED EARNINGS PER SHARE

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes2.html (2 of 5) [4/18/2001 5:57:15 PM]

Notes To Financial Statements pg2

The calculations of basic and diluted earnings per share for fiscal years 1998, 1997 and 1996 were as follows (amounts in millions, except per share data):

Employee stock plans represent shares granted under the Company’s employee stock purchase plan and stock option plans, as well as shares issued for deferred compensation stock plans. For fiscal years 1998, 1997 and 1996, shares issuable upon conversion of the Company’s 3 1 Ú4 % Notes, issued in October 1996, were included in weighted average shares assuming dilution for purposes of calculating diluted earnings per share. To calculate diluted earnings per share, net earnings are adjusted for tax-effected net interest and issue costs on the 3 1 Ú4 % Notes and divided by weighted average shares assuming dilution. note

8 LAWSUIT SETTLEMENTS

During fiscal 1997, the Company, without admitting any wrong-doing, entered into a settlement agreement with plaintiffs in the class action lawsuit Butler et. al. v. Home Depot, Inc., in which the plaintiffs had asserted claims of gender discrimination. The Company subsequently reached agreements to settle three other lawsuits seeking class action status, each of which involved claims of gender discrimination. As a result of these agreements, the Company recorded a pre-tax non-recurring charge of $104 million in fiscal 1997 and, in fiscal 1998, made payments to settle these agreements. The payments made in fiscal 1998 included $65 million to the plaintiff class members and $22.5 million to the plaintiffs’ attorneys in Butler, and approximately $8 million for other related internal costs, including implementation or enhancement of certain Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes2.html (3 of 5) [4/18/2001 5:57:15 PM]

Notes To Financial Statements pg2

human resources programs, as well as the settlement terms of the three other lawsuits. The Company expects to spend the remaining $9 million for related internal costs over the next two years. Excluding the non-recurring charge, diluted earnings per share for fiscal 1997 were $0.82 compared to $0.78 as reported. note

9 COMMITMENTS AND CONTINGENCIES

At January 31, 1999, the Company was contingently liable for approximately $431 million under outstanding letters of credit issued primarily in connection with purchase commitments. The Company is involved in litigation arising from the normal course of business. In management’s opinion, this litigation is not expected to materially impact the Company’s consolidated results of operations or financial condition. note

10 MERGERS AND ACQUISITIONS

During the first quarter of fiscal 1998, the Company purchased, for $261 million, the remaining 25% partnership interest held by The Molson Companies in The Home Depot Canada. The excess purchase price over the estimated fair value of net assets of $117 million as of the acquisition date was recorded as good-will and is being amortized over 40 years. As a result of this transaction, the Company now owns all of The Home Depot’s Canadian operations. The Home Depot Canada partnership was formed in 1994 when the Company acquired 75% of Aikenhead’s Home Improvement Warehouse for approximately $162 million. The terms of the original partnership agreement provided for a put/call option, which would have resulted in the Company purchasing the remaining 25% of The Home Depot Canada at any time after the sixth anniversary of the original agreement. The companies reached a mutual agreement to complete the purchase transaction at an earlier date. note

11 QUARTERLY FINANCIAL DATA

The following is a summary of the unaudited quarterly results of operations for the fiscal years ended January 31, 1999 and February 1, 1998 (dollars in millions, except per share data):

Back

Next

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes2.html (4 of 5) [4/18/2001 5:57:15 PM]

Notes To Financial Statements pg2

Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/notes2.html (5 of 5) [4/18/2001 5:57:15 PM]

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The financial statements presented in this Annual Report have been prepared with integrity and objectivity and are the responsibility of the management of The Home Depot, Inc. These financial statements have been prepared in conformity with generally accepted accounting principles and properly reflect certain estimates and judgments based upon the best available information. The Company maintains a system of internal accounting controls, which is supported by an internal audit program and is designed to provide reasonable assurance, at an appropriate cost, that the Company’s assets are safeguarded and transactions are properly recorded. This system is continually reviewed and modified in response to changing business conditions and operations and as a result of recommendations by the external and internal auditors. In addition, the Company has distributed to associates its policies for conducting business affairs in a lawful and ethical manner. The financial statements of the Company have been audited by KPMG LLP, independent auditors. Their accompanying report is based upon an audit conducted in accordance with generally accepted auditing standards, including the related review of internal accounting controls and financial reporting matters. The Audit Committee of the Board of Directors, consisting solely of outside Directors, meets quarterly with the independent auditors, the internal auditors and representatives of management to discuss auditing and financial reporting matters. The Audit Committee, acting on behalf of the stockholders, maintains an ongoing appraisal of the internal accounting controls, the activities of the outside auditors and internal auditors and the financial condition of the Company. Both the Company’s independent auditors and the internal auditors have free access to the Audit Committee.

Dennis Carey Executive Vice President and Chief Financial Officer

Marshall L. Day Senior Vice President– Finance and Accounting

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/o-manage_resp.html [4/18/2001 5:57:21 PM]

Report of Independent Accountants

INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS AND STOCKHOLDERS The Home Depot, Inc.: We have audited the accompanying consolidated balance sheets of The Home Depot, Inc. and subsidiaries as of January 31, 1999 and February 1, 1998, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended January 31, 1999. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Home Depot, Inc. and subsidiaries as of January 31, 1999 and February 1, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended January 31, 1999 in conformity with generally accepted accounting principles.

Atlanta, Georgia March 12, 1999

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/p-indp_accnt.html [4/18/2001 5:57:26 PM]

10-YEAR SUMMARY OF FINANCIAL AND OPERATING RESULTS THE HOME DEPOT, INC. AND SUBSIDIARIES

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/ten_year.html (1 of 4) [4/18/2001 5:57:33 PM]

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/ten_year.html (2 of 4) [4/18/2001 5:57:33 PM]

(1) Fiscal years 1996 and 1990 consisted of 53 weeks; all other years reported consisted of 52 weeks. (2) Excludes the effect of a $104 million non-recurring charge in fiscal 1997. (3) All share and per share data have been adjusted for a two-for-one stock split on July 2, 1998. (4) Diluted earnings per share for fiscal 1997, including a $104 million non-recurring charge, were $0.78 (see note 8 of the Notes to Consolidated Financial Statements). (5) Excludes Maintenance Warehouse and National Blinds and Wallpaper, Inc. Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/ten_year.html (3 of 4) [4/18/2001 5:57:33 PM]

(6) Adjusted to reflect the first 52 weeks of the 53-week fiscal years in 1996 and 1990.

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/ten_year.html (4 of 4) [4/18/2001 5:57:33 PM]

10-YEAR SUMMARY OF FINANCIAL AND OPERATING RESULTS THE HOME DEPOT, INC. AND SUBSIDIARIES

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/ten_year2.html (1 of 4) [4/18/2001 5:57:39 PM]

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/ten_year2.html (2 of 4) [4/18/2001 5:57:39 PM]

(1) Fiscal years 1996 and 1990 consisted of 53 weeks; all other years reported consisted of 52 weeks. (2) Excludes the effect of a $104 million non-recurring charge in fiscal 1997. (3) All share and per share data have been adjusted for a two-for-one stock split on July 2, 1998. (4) Diluted earnings per share for fiscal 1997, including a $104 million non-recurring charge, were $0.78 (see note 8 of the Notes to Consolidated Financial Statements). (5) Excludes Maintenance Warehouse and National Blinds and Wallpaper, Inc. (6) Adjusted to reflect the first 52 weeks of the 53-week fiscal years in 1996 and 1990.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/ten_year2.html (3 of 4) [4/18/2001 5:57:39 PM]

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/ten_year2.html (4 of 4) [4/18/2001 5:57:39 PM]

Board of Directors

THE HOME DEPOT, AND SUBSIDIARIES

DIRECTORS

BERNARD MARCUS* Chairman of the Board, The Home Depot, Inc.

JOHNNETTA B. COLE (1) President Emerita, Spelman College

ARTHUR M. BLANK* President and Chief Executive Officer, The Home Depot, Inc.

BERRY R. COX** + Private Investor

KENNETH G. L ANGONE* Lead Director; Chairman of the Board, Chief Executive Officer and President, Invemed Associates, Inc., investment banking FRANK BORMAN** + Retired Chairman of the Board and Chief Executive Officer, Eastern Airlines, Inc., Chairman of the Board, DBT Online Inc., online data services, and President and Chief Executive Officer, Patlex Corporation RONALD M. BRILL Executive Vice President and Chief Administrative Officer, The Home Depot, Inc. JOHN L. CLENDENI N** + Retired Chairman of the Board, President and Chief Executive Officer, BellSouth Corporation

MILLEDGE A. HART, I I I** Chairman of the Board, Hart Group, Inc., private management services BONNIE G. HILL (2) Vice President, The Times Mirror Company, and President and Chief Executive Officer, The Times Mirror Foundation DONALD R. KEOUGH** +(3) Retired President and Chief Operating Officer, The Coca-Cola Company, and Chairman of the Board, Allen & Company Inc. and Excalibur Technologies Corporation M. FAYE WILSON Senior Vice President –Values Initiatives, The Home Depot, Inc. * ** + (1) (2) (3)

Member of the Executive Committee Member of the Audit Committee Member of the Compensation Committee Retiring effective April 1999 Nominated pending stockholder approval Retiring effective May 1999

OFFICERS

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/board_dir.html (1 of 5) [4/18/2001 5:57:43 PM]

Board of Directors

STORE SUPPORT CENTER Executive Officers

DIVISION AND SUBSIDIARY OFFICERS

BERNARD MARCUS* Chairman of the Board

MIDWEST DIVISION

ARTHUR M. BLANK* President and Chief Executive Officer RONALD M. BRILL* Executive Vice President and Chief Administrative Officer

MARK BAKER* President Vice Presidents H. GEORGE COLLINS Store Operations

ROBERT GILBRETH DENNIS J. CAREY* Executive Vice President and Chief Financial Officer Store Operations BILL HAMLIN* Executive Vice President, Merchandising and Group President LARRY M. MERCER* Executive Vice President, Operations and Group President JEFFREY W. COHEN* Group President, Direct Marketing Businesses DAVID SULITEANU* Group President, Diversified Businesses

STEVEN L. MAHURIN Merchandising NORTHEAST DIVISION VERN JOSLYN* President Vice Presidents JEFF BIRREN Store Operations

Senior Vice Presidents

CAROL A. FREITAG Human Resources

ALAN BARNABY Store Operations

WILLIAM G. LENNIE Merchandising

MARSHALL L. DAY* Finance and Accounting

MICHAEL MCCABE Store Operations

PAT FARRAH Merchandising

RON WHITED Store Operations

BRYAN J. FIELDS Real Estate

SOUTHEAST DIVISION

RON GRIFFIN Information Services RICHARD A. HAMMILL Marketing and Communications W. ANDREW MCKENNA Strategic Business Development STEPHEN R. MESSANA* Human Resources DENNIS J. RYAN Merchandising

TONY BROWN* President Vice Presidents TIMOTHY J. BOLTON Human Resources DENNIS JOHNSON Merchandising ERIC JOHNSON Store Operations DAN KNEIP Store Operations

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/board_dir.html (2 of 5) [4/18/2001 5:57:43 PM]

Board of Directors

LAWRENCE A. SMITH* Legal and Secretary RICHARD L. SULLIVAN Advertising MIKE TRACY Proprietary Brands KENNETH W. UBERTINO Merchandising M. FAYE WILSON* Values Initiatives ROBERT J. WITTMAN Business Development Vice Presidents Vice Presidents MIKE ANDERSON Information Services LARRY APPEL Business Law Group SUZANNE H. APPLE Community Affairs BEN A. BARONE Credit Marketing

GREG TURNER Store Operations JOHN WICKS Merchandising SOUTHWEST DIVISION BARRY L. SILVERMAN* President Vice Presidents JERRY EDWARDS Merchandising JOSEPH C. IZGANICS Store Operations FRANK ROSI Human Resources TOM TAYLOR Store Operations WESTERN DIVISION LYNN MARTINEAU* President Vice Presidents

DAVID I. BOGAGE Management and Organization Development

TERRY HOPPER Store Operations

GARY C. COCHRAN Information Services

ETHAN KLAUSNER Merchandising

CHARLES D. CROWELL Distribution Services

MICHAEL C. O'HAGAN Human Resources

DAVE ELLIS Information Services

BRUCE MERINO Merchandising

KERRI E R. FLANAGAN Merchandise Accounting

TIMOTHY J. PFEIFFER Store Operations

MIKE FOLIO Real Estate

THOMAS "BUZ" SMITH Store Operations

FRANK C. GENNACCARO Business Development

EXPO DESIGN CENTER DIVISION

WAYNE GIBSON Imports/Logistics

BRYANT W. SCOTT President

PAUL HOEDEMAN Information Services

Vice Presidents STEVE O. SMITH

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/board_dir.html (3 of 5) [4/18/2001 5:57:43 PM]

Board of Directors

KATHRYN E. LEE Real Estate Law Group RICH MARSHALL Construction/Store Planning/ Maintenance PEDRO MENDIGUREN Business Development

Merchandising CHRISTOPHER MCLOUGHLIN Division Controller THE HOME DEPOT CANADA ANNETTE M. VERSCHUREN* President

GENE ORMOND Government Relations

Vice Presidents

WILLIAM K. SCHLEGEL Imports

PAT BENNETT Store Operations

CAROL A. SCHUMACHER Public Relations

JOHN HAYES Merchandising

KIM SHRECKENGOST Investor Relations

CATHERINE M. SHAH Human Resources

DON SINGLETARY Human Resources– North America Stores

THE HOME DEPOT INTERNATIONAL

GRADY STEWART Operations – Special Projects CAROL B. TOME Treasurer DEWAYNE TRUITT Compensation and Benefits GREGG VICKERY Controller EDWARD A. WOLFE Loss Prevention KEN J. YOUNG Internal Audit

BILL PENA President, Chile/Argentina Vice Presidents JORGE CORA International Controller DAN PARIS Chile/Argentina MAINTENANCE WAREHOUSE Vice Presidents JIM ARDELL Merchandising MIKE BROWN Information Systems BILL LUTH Marketing KEVIN PETERS Logistics RON TURK Chief Financial Officer JEFF WENHAM Human Resources NATIONAL BLINDS & WALLPAPER, INC. DAVID KATZMAN President

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/board_dir.html (4 of 5) [4/18/2001 5:57:43 PM]

Board of Directors

RICK KOVACS Senior Vice President, Merchandising Vice Presidents STEVE KAIP Information Systems DAVID LITTLESON Chief Financial Officer BOB SHEPARD Installation/Retail Development *Executive officer or officer subject to the reporting requirements of Section 16 of the Securities Exchange Act of 1934.

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/board_dir.html (5 of 5) [4/18/2001 5:57:43 PM]

Information for Shareholders

CORPORATE AND STOCKHOLDER INFORMATION THE HOME DEPOT, AND SUBSIDIARIES Store Support Center The Home Depot, Inc. 2455 Paces Ferry Road, NW Atlanta, Georgia 30339-4024 Telephone: 770-433-8211 Transfer Agent and Registrar BankBoston, N.A. c/o EquiServe P.O. Box 8040 Boston, Massachusetts 02266-8040 Telephone: 1-800-577-0177 (Voice) 1-800-952-9245 (TTY/TDD) Internet address: http://www.equiserve.com Independent Auditors KPMG LLP Suite 2000 303 Peachtree Street, NE Atlanta, Georgia 30308 Stock Exchange Listing New York Stock Exchange Trading Symbol – HD Annual Meeting The Annual Meeting of Stockholders will be held at 10:00 a.m., May 26, 1999, at Cobb Galleria Centre, 2 Galleria Parkway, Atlanta, Georgia 30339. Number of Stockholders As of March 12, 1999, there were approximately 147,490 stockholders of record. This number excludes individual stockholders holding stock under nominee security position listings. Dividends per Common Share

Direct Stock Purchase/Dividend Reinvestment Plan New investors may make an initial investment and stockholders of record may acquire additional shares of The Home Depot common stock through DepotDirect SM , the Company’s direct stock purchase and dividend reinvestment plan. Subject to certain requirements, initial cash investments, quarterly cash dividends and/or additional optional cash purchases may be invested through this plan.

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/info.html (1 of 2) [4/18/2001 5:57:51 PM]

Information for Shareholders

To obtain enrollment materials, including the prospectus, see http: //www.homedepot.com on the Internet, or call 1-800-928-0380. For all other communications regarding these services, contact: BankBoston, N.A. c/o EquiServe P.O. Box 8040 Boston, Massachusetts 02266-8040 Telephone: 1-800-577-0177 (Voice) 1-800-952-9245 (TTY/TDD) Financial and Other Company Information A copy of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 1999, as filed with the Securities and Exchange Commission, will be mailed upon request to: The Home Depot, Inc. Investor Relations 2455 Paces Ferry Road, NW Atlanta, Georgia 30339-4024 Telephone: 770-384-4388 In addition, financial reports, recent filings with the Securities and Exchange Commission (including Form 10-K), store locations, news releases and other Company information are available via the Internet at http: //www.homedepot.com. For a copy of the 1998 Home Depot Corporate Social Responsibility Report, which also includes guidelines for applying for philanthropic grants, contact the Community Affairs department at the Store Support Center, or access http: //www.homedepot.com on the Internet. Quarterly Stock Price Range

Back

Next Table of Contents

Brought to you by Global Reports http://www.homedepot.com/HDUS/EN_US/compinfo/financial/annual/1998/info.html (2 of 2) [4/18/2001 5:57:51 PM]