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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file number 0-21318
O'REILLY AUTOMOTIVE, INC.
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(Exact name of registrant as specified in its charter)
Missouri 44-0618012
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
233 South Patterson
Springfield, Missouri 65801
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(Address of principal executive offices, zip code)
(417) 862-6708
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
_______
At February 28, 1997, an aggregate of 10,474,778 shares of the common stock of
the registrant were outstanding. As of that date, the aggregate market value of
the voting stock held by non-affiliates of the Company was approximately
$181,118,849, based on the last sale price of the common stock reported by the
NASDAQ Stock Market (National Market).
DOCUMENTS INCORPORATED BY REFERENCE
As provided herein, portions of the registrant's documents specified below are
incorporated herein by reference:
Document Part-Form 10-K
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Portions of the Annual Shareholders'
Report for the Year Ended December 31,
1996 Parts I, II and IV
Proxy Statement for 1997 Annual Meeting
of Stockholders (to be filed pursuant
to Regulation 14A within 120 days of
the end of registrant's most recently
completed fiscal year) Part III
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The information contained in this Form 10-K includes statements regarding
matters which are not historical facts (including statements as to O'Reilly
Automotive, Inc.'s (the "Company") plans, beliefs or expectations) which are
forward-looking statements within the meaning of the federal securities laws.
Because such forward-looking statements involve certain risks and uncertainties,
the Company's actual results and the timing of certain events could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed in the Sections captioned "Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" (incorporated herein by reference) and those risk factors discussed
in Exhibit 99.1 hereto.
PART I
ITEM 1 BUSINESS
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General
O'Reilly Automotive, Inc. ("O'Reilly" or the "Company") is a specialty
retailer and supplier of automotive aftermarket parts, tools, supplies,
equipment and accessories ("Automotive Products") to both "do-it-yourself"
("DIY") customers and professional mechanics or service technicians
("Professional Installers"). The Company, which was founded in 1957 by the
O'Reilly family in Springfield, Missouri, operates 219 stores (at December 31,
1996) within the states of Missouri, Arkansas, Kansas and Oklahoma. See "Growth
and Expansion Strategies." O'Reilly stores carry an extensive product line
consisting of (i) new and remanufactured automotive hard parts, such as
alternators, starters, fuel pumps, water pumps, and brake shoes and pads, (ii)
maintenance items, such as oil, antifreeze, fluids, engine additives and
appearance products, (iii) accessories, such as floor mats and seat covers, and
(iv) a complete line of autobody paint and related materials, automotive tools
and professional service equipment. The Company offers machining services
through its O'Reilly stores, but does not sell tires or perform automotive
repairs or installations. Approximately 97% of the Company's 1996 product sales
were generated through the O'Reilly store network, of which approximately one-
half was derived from DIY customers and one-half from Professional Installers.
The remaining 3% of the Company's product sales was generated by its wholly-
owned subsidiary, Ozark Automotive Distributors, Inc. ("Ozark"), through
wholesale sales to independently owned auto parts stores.
Background
O'Reilly was founded in 1957 by Charles F. O'Reilly and his son, Charles H.
"Chub" O'Reilly, Sr. (a current director of the Company) and initially operated
from a single store in Springfield, Missouri, with 12 employees selling
primarily to the Professional Installer portion of the market. O'Reilly
established Ozark in October 1960 to purchase Automotive Products directly from
the manufacturer and to distribute such Automotive Products to O'Reilly.
The Company has experienced steady growth from its first year of operation.
By 1980, each of Chub O'Reilly's children, Charles, Lawrence and David O'Reilly
and Rosalie O'Reilly Wooten, had assumed leadership roles in the Company.
Together with their father, they have managed the Company through a period of
rapid growth and profitability.
The Company's goal is to continue its pattern of growth in sales and
profitability by capitalizing on its role as a leading specialty retailer and
supplier of Automotive Products throughout its markets. The key elements of the
multifaceted business strategy developed by the Company to achieve this goal are
discussed below.
Operating Strategies
Dual Market Strategy. The Company believes that because it aggressively
pursues both the DIY and the Professional Installer portions of the automotive
aftermarket through its O'Reilly store network, the Company can successfully
compete not only in large metropolitan markets but also in less densely
populated areas. In 1996, the Company derived approximately one-half of its
O'Reilly
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store network sales by selling to the DIY market and approximately one-half of
such sales by selling to the Professional Installer market. By serving both
portions of the market, the Company believes that it is able to reach
substantially all consumers of Automotive Products within its market areas. The
increased demand generated by this expanded customer base permits the Company to
(i) stock (either in-store or at its distribution centers) a broader selection
of stock keeping units ("SKU's"), and (ii) restock and fill special orders from
its distribution centers on an overnight, or in some cases, a same-day basis.
See "Inventory Management and Distribution Systems."
The Company also believes that its service to both the DIY and Professional
Installer portions of the automotive aftermarket results in additional benefits
not generally enjoyed by competitors serving only one portion of the market.
Because the Company deals with the more technically-oriented Professional
Installers, the Company's Professional Parts People are required to be more
technically proficient, particularly with regard to hard parts. The Company has
found that such technical proficiency is also valued by its DIY consumers,
thereby enhancing the Company's ability to execute its customer service
strategy. Further, the Company has found that the more progressive marketing
concepts utilized in the DIY portion of its business can be applied to increase
sales of Automotive Products to the Company's Professional Installer customers.
Inventory Management and Distribution Systems. The Company's inventory
management and distribution systems, which electronically link each O'Reilly
store to a distribution center, provide an efficient and sophisticated means of
inventory control and management. The computer system at each O'Reilly store
records each sale, makes a corresponding inventory adjustment and orders
replacement inventory from the distribution center. The Company utilizes an
industry ranking method, in addition to its own evaluation criteria, for each
SKU carried at the distribution center which identifies and classifies each SKU
by demand. Refinements to inventory levels to be carried in the stores are made
continuously based in large part on the sales movement shown by the Company's
computerized inventory control system and on management's assessment of the
changes and trends in the marketplace. Under arrangements with most suppliers of
Automotive Products, slow moving or obsolete merchandise is returned to the
supplier for full credit. Accordingly, the Company experiences little
obsolescence in its inventory.
The Company's distribution centers are equipped with highly automated
conveyor systems which expedite the movement of Automotive Products to loading
areas for shipment to individual stores on a nightly basis. The distribution
centers utilize computer assisted technology to electronically receive orders
from computers located in each O'Reilly store. The Company, which continually
seeks to further enhance these systems, has installed a bar code system in its
stores. In addition, the Company has established a satellite-based data
interchange system between those O'Reilly stores in which high-speed data
transmission technology is not readily available, the distribution center which
services such stores and the O'Reilly corporate headquarters.
During 1996, the Company's three distribution centers experienced an annual
inventory turn of approximately 5.8 times, and the O'Reilly store network had an
average inventory turn of approximately 4.1 times. The Company believes that its
warehouse distribution system enables it to maintain optimum inventory levels
throughout the O'Reilly store network and, at the same time, provide its
customers with an outstanding selection of SKUs at each O'Reilly store site. The
Company further believes that its ability to provide its customers with access
to over 105,000 SKUs (many of which are lower turnover items not typically
stocked at other parts stores) on an overnight and, in some cases, a same day
basis results in an important competitive advantage enjoyed by the Company in
this key area of SKU selection and availability.
Superior Customer Service. The Company's number one priority is customer
satisfaction. The Company seeks to attract new DIY and Professional Installer
customers and to retain existing customers by conducting a variety of
advertising and promotional programs and by offering (i) superior in-store
service through highly-motivated, technically-proficient Professional Parts
People using advanced point-of-sale systems, (ii) an extensive selection of SKUs
stocked in each store, (iii) same day or overnight availability of over 105,000
SKUs made possible through the Company's rapid, on-line communication with its
distribution centers, (iv) attractive stores in convenient locations, and (v)
competitive pricing supported by the Company's Right Part, Right Price, Right
Now(R) policy.
Each of O'Reilly's Professional Parts People is required to be technically
proficient in the workings and application of Automotive Products. See "Store
Operations--Store Personnel and Training." This degree of technical proficiency
is essential because of the significant portion of the Company's business
represented by the Professional Installer. The Company has found that
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the typical DIY customer often seeks assistance from sales persons, particularly
in connection with the purchase of hard parts. The Company believes that the
ability of its Professional Parts People to provide such assistance to the DIY
consumer is valued by the DIY customer, and therefore is likely to result in
repeat DIY business. To assist the Company's Professional Parts People in
providing superior customer service, the Company has installed advanced point-
of-sale information systems. These systems provide individual O'Reilly stores
with access to the Company's database of manufacturer recommended parts (the
"electronic catalog") and the ability to locate parts at other O'Reilly stores.
These systems also significantly shorten the time period required to obtain
credit card and personal check approvals.
The Company believes that the satisfaction of DIY and Professional
Installer customers often is substantially dependent upon the Company's ability
to offer the specific Automotive Product requested. Accordingly, each O'Reilly
store carries a broad selection of Automotive Products designed to cover a broad
range of vehicle specifications. To emphasize its commitment to providing its
customers with the Automotive Products requested, the Company has instituted a
Right Part, Right Price, Right Now(R) policy. Under this policy, if any of the
15,000 most commonly requested Automotive Products is not available in-store
when the customer requests it, the Company will apply a 5% discount to the
purchase price of the item and the part will usually be available within 24
hours from one of the Company's distribution centers.
The Company believes that O'Reilly stores are "destination stores"
generating their own traffic rather than relying on traffic created by the
presence of other stores in the immediate vicinity. Consequently, most O'Reilly
stores are free-standing buildings situated on or near major traffic
thoroughfares. O'Reilly stores offer ample parking and easy customer access.
The Company believes that a competitive pricing policy is essential within
product categories in order to compete successfully. Product pricing is
generally established to meet the pricing policies of competitors in the market
area served by each store. Most Automotive Products sold by the Company are
priced at discounts from the manufacturer suggested prices and additional
savings are offered through volume discounts and special promotional pricing.
Consistent with its Right Part, Right Price, Right Now(R) policy, each O'Reilly
store will match any verifiable price on any in-stock product of the same or
comparable quality offered by any of its competitors.
Growth and Expansion Strategies
Accelerated New Store Openings. The Company's ability to open new stores in
both existing and new markets since the beginning of 1980 has been a significant
factor in achieving its rapid growth in product sales and profitability. The
Company operates 219 stores (at December 31, 1996) within the states of
Missouri, Arkansas, Kansas and Oklahoma and for the five years ended December
31, 1996 has increased the number of O'Reilly stores at an average annual rate
of approximately 14%. The Company has adopted certain strategic initiatives
designed to accelerate its new store opening rate to approximately 19% by 1998.
The Company intends to open 40 new stores in 1997 and 50 new stores in 1998,
including stores to be opened in the new market areas of Iowa and Nebraska, and
additional stores in the Company's current market areas. Management believes
that the Company's ability to open new stores at this accelerated rate will
continue to be a significant factor in achieving its growth objectives for the
future, and that substantial opportunities exist for the opening of new stores
to achieve greater penetration in existing markets and to expand into new
contiguous markets.
Until 1986, the Company's expansion was targeted to markets with
populations of less than 100,000. The Company entered into a more densely
populated market in August 1986 with the opening of the first of its 29 stores
which now serve the greater Kansas City, Missouri, marketing area. Of the 31
stores opened in 1996, 5 are located in the Wichita, Kansas market, and the
remainder are located in other markets, primarily in Oklahoma and Kansas. While
the Company has faced, and expects to continue to face, more aggressive
competition in its more densely populated markets, the Company believes that it
has competed effectively, and that it is well positioned to continue to compete
effectively, in such markets and achieve its goal of continued sales and profit
growth within these markets. The Company also believes that because of its Dual
Market Strategy, the Company is better able to operate stores in less densely
populated areas within its regional market which would not otherwise support a
national or regional chain store selling to one portion of the market or the
other. Consequently, the Company expects to continue to open new stores in less
densely populated market areas.
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To date, the Company has experienced no significant difficulties in
locating suitable store sites for construction of new stores or identifying
suitable acquisition candidates for conversion to O'Reilly stores. New stores
are opened by the Company either (i) by constructing a new store at a site which
is purchased or leased and stocking the new store with fixtures and inventory,
or (ii) by acquiring an independently owned parts store, typically by the
purchase of substantially all of the inventory and other assets (other than
realty) of such store. The costs associated with the opening of a new O'Reilly
store (including the cost of land acquisition, improvements, fixtures, inventory
and computer equipment) are estimated to average approximately $800,000-
$1,000,000; however, such costs may be significantly reduced where the Company
leases, rather than purchases, the store site. Although the cost to acquire the
business of an independently owned parts store varies, depending primarily upon
the amount of inventory and the amount, if any, of real estate being acquired,
the Company estimates that the average cost to acquire such a business and
convert it to an O'Reilly store is approximately $400,000. Store sites are
strategically located in clusters within geographic areas which complement the
Company's distribution system in order to achieve economies of scale in
management, advertising, and distribution costs. Other key factors considered by
the Company in the site selection process include population density and growth
patterns, age and per capita income, vehicle traffic counts, the number and type
of existing automotive repair facilities, auto parts stores, and other
competitors within a pre-determined radius, and the operational strength of such
competitors. When entering new, more densely populated markets, the Company
generally seeks to initially open several stores within a short span of time in
order to maximize the effect of initial promotional programs and achieve further
economies of scale.
Same store growth through increased sales and profitability is also an
important part of the Company's growth strategy. To achieve improved sales and
profitability at existing O'Reilly stores, the Company continually strives to
improve upon the service provided to its customers. The Company believes that
while competitive pricing is essential in the competitive environment of the
automotive aftermarket business, it is customer satisfaction (whether of the DIY
consumer or Professional Installer), resulting from superior customer service
that generates increased sales and profitability.
Store Design and Location. The Company's current prototype store design,
completed in 1994, features several enhancements designed to increase product
sales, customer service and operating efficiencies, which generally includes
greater square footage, higher ceilings, new fixtures, more convenient interior
store layouts, brighter lighting, increased parking availability and dedicated
counters to serve Professional Installers. The Company aggressively manages its
store network through systematic renovation and relocation of existing O'Reilly
stores which conform with the Company's prototype store design. In 1996, the
Company renovated or relocated 32 stores.
Expansion of Distribution System. In order to facilitate its store
expansion strategy, the Company utilizes a central warehouse distribution system
to distribute Automotive Products to its O'Reilly store network. The Company,
through its Ozark subsidiary, currently operates a 212,000 square foot warehouse
distribution center (including 51,000 square feet of mezzanine space) located in
Springfield, Missouri, a 113,000 square foot warehouse distribution center
(including 36,000 square feet of mezzanine space) located in Kansas City,
Missouri and a 123,000 square foot distribution center (including 33,000 square
feet of mezzanine space) located in Oklahoma City, Oklahoma, which opened in
March, 1996 for receiving, storing and distributing Automotive Products. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company also operates a 36,000 square foot bulk merchandise
warehouse in Springfield, Missouri for the distribution of bulk products such as
motor oil, antifreeze, batteries, lubricants and other fast moving bulk
products. The bulk warehouse facility is located adjacent to the main
distribution center in Springfield. The Company believes that its distribution
system results in lower inventory carrying costs, improved in-stock positions at
the O'Reilly stores, and superior inventory control and management. Moreover,
the Company believes that its expanding network of distribution centers allows
it to efficiently service existing O'Reilly stores, as well as new stores
planned for opening in contiguous market areas. The Company's distribution
center expansion strategy also complements its new store opening strategy by
supporting newly established clusters of stores located in the regions
surrounding each distribution center.
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Store Operations
Store Layout. Although the Company has no present intention to open new
Level 2 Stores, the O'Reilly store network is composed generally of three store
formats consisting of the Level 2 Store, the Level 1 Store and the Master
Inventory Store which, as of December 31, 1996, are categorized based on the
number of in-stock SKUs as follows:
<TABLE>
<CAPTION>
Approximate
Number of Range of Number of
Store Format Stores Square Footage In-Stock SKUs
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<S> <C> <C> <C>
Level 2 Stores 31 3,000 - 5,000 12,000 - 16,000
Level 1 Stores (prototype) 164 4,000 - 8,000 16,001 - 25,000
Master Inventory Stores 24 6,000 - 12,000 25,001 - 44,000
</TABLE>
The primary function of the Master Inventory Stores, like all other
O'Reilly stores, is to sell Automotive Products to both portions of the
marketplace. However, because Master Inventory Stores carry a greater selection
of SKUs, including certain lower turnover hard parts not typically carried in
the Level 1 or Level 2 Stores, a Master Inventory Store also provides the other
O'Reilly stores within its area with access to a greater selection of SKUs on a
same-day basis.
O'Reilly stores offer the DIY and the Professional Installer customer a
wide selection of nationally recognized brand name and private label SKUs for
domestic and imported automobiles, vans and trucks. New and remanufactured
automotive hard parts, such as engine and transmission parts, alternators,
starters, water pumps, and brake shoes and pads, have accounted for a majority
of total sales. An O'Reilly store also carries an extensive selection of
maintenance items, such as oil, antifreeze, fluids, engine additives, appearance
products, and accessories, such as floor mats and seat covers, and a complete
line of autobody paint and related materials, automotive tools and professional
service equipment. Maintenance items and accessories have accounted for most of
the remaining sales. The Company operates machine shops in 11 regional
locations, 10 of which are located at an O'Reilly store. One machine shop,
located in Springfield, Missouri, is free-standing. The O'Reilly machine shops
perform engine machining services (such as block boring, head resurfacing, and
crankshaft grinding) for DIY and Professional Installer consumers of such
services. The Company believes that its performance of this service is valuable
not only in maintaining its relationships with its DIY and Professional
Installer customers but in attracting new customers, in each case resulting in
increased sales of Automotive Products. Each O'Reilly machine shop is equipped
with sophisticated equipment, and employs ASE certified machinists having an
average of approximately ten years experience in machining.
Store exteriors generally feature a light tan facade highlighted by an
attractive red, white and green stripe, with the name O'Reilly Auto Parts
written in kelly green letters on a white background in a lighted sign. During
1994, a friendlier and more modern store format with an open architectural style
was introduced. These new stores feature greater square footage, higher
ceilings, brighter lighting, taller fixtures and a more attractive interior
design. The Company utilizes a computer-assisted "plan-o-grammed" store layout
system to provide uniform and consistent merchandise presentation; however some
variation occurs in order to meet the specific needs of a particular market
area. Merchandise is arranged to provide easy customer access and maximum
selling space, keeping high-turnover products and accessories within view of the
customer, and aisle displays are generally used to feature high-demand or
seasonal merchandise, new items and advertised specials. All stores have a
counter adjacent to the front display area where automotive replacement hard
parts that do not lend themselves to display are available. Although store hours
may vary by market area, O'Reilly stores are generally open Monday through
Friday, 8:00 a.m. to 9:00 p.m., Saturday, 8:00 a.m. to 8:00 p.m. and Sunday,
9:00 a.m. to 6:00 p.m. O'Reilly stores accept cash, checks and major credit
cards and extend short-term credit to those Professional Installers who satisfy
the Company's credit requirements.
Store Automation. To enhance store level operations and customer service,
the Company has installed advanced point-of-sale computer terminals which are
generally located on the hard parts counters. These point-of-sale terminals are
linked with the IBM AS/400 computers located in each of the Company's
distribution centers and utilize bar code scanning technology to price
merchandise in sales transactions. In addition, the point-of-sale terminals
provide immediate access to the Company's electronic catalog to display parts
and pricing information by make, model and year of vehicle. This system speeds
transaction times, reduces
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register lines and provides enhanced customer service. Moreover, this system
captures sales information which assists in store management, strategic
planning, inventory control and distribution effectiveness.
Store Personnel and Training. The Company believes that technical
proficiency on the part of each sales specialist is essential to meet the needs
of its customers, particularly the Professional Installer, and that the
technical proficiency of its Professional Parts People resulting from O'Reilly's
extensive and ongoing training program provides the Company with a significant
advantage over its competitors, particularly the smaller retail operators and
the less specialized mass merchandisers.
The Company's training function is managed by a full time training director
who, together with his staff, is headquartered in Springfield, Missouri. There
currently are regional trainers located in Springfield, Missouri, Kansas City,
Missouri and Oklahoma City, Oklahoma. The Company screens prospective employees
to identify highly-motivated individuals with either experience in automotive
parts or repairs, or an aptitude for automotive knowledge. Each person who
becomes an employee, or "team member," first participates in an intensive two-
day orientation program designed to introduce the team member to the Company
culture and specific job duties before being assigned specific job
responsibilities. The successful completion of additional training is required
before a team member is deemed qualified as a parts specialist and thus able to
work at the parts counter at an O'Reilly store. All new counter people are
required to successfully complete a six-month basic automotive systems training
course and are then enrolled in a six-month advanced automotive systems course
for ASE certification. In addition to extensive on-the-job training under the
supervision of the store manager or assistant store manager, each team member
completes a weekly training assignment and has available to him or her a number
of training programs (videos, booklets, etc.) presented by the Company under the
direction of the training director. For example, team members are given notice
of and encouraged to attend seminars designed by the Company primarily for its
Professional Installer customers. The seminars are generally conducted by the
Company's technical trainer or by representatives of a manufacturer or supplier,
and focus primarily on advanced automotive systems and parts knowledge.
Each O'Reilly store participates in the Company's sales specialist training
program that is conducted by the operations training manager. Under this
program, selected team members complete two days of extensive sales call
training for business development, after which these team members will spend one
day per week calling on existing and new Professional Installer customers.
Additionally, each team member engaged in such sales activities will participate
in quarterly advanced training programs for sales and business development.
Management training is also an important part of the Company's training
program. Each O'Reilly store is staffed with a store manager and an assistant
manager, in addition to the counter sales persons and support staff required to
meet the specific needs of each store. There are currently 27 district managers,
each of whom has general supervisory responsibility for an average of eight
O'Reilly stores within such manager's district. Each district manager receives
comprehensive training on a monthly basis at the Company's headquarters focusing
on management techniques, new product announcements, advanced automotive systems
and Company policies and procedures. In turn, the information covered at such
monthly meetings is discussed in full by district managers at monthly meetings
with their store managers. All assistant managers and manager trainees are
required to successfully complete a six-month manager development program, which
includes 85 hours of classroom and field training, as a prerequisite to becoming
a store manager. This program covers operations extensively, as well as
principles of successful management.
The Company provides financial incentives to its district managers, store
managers, assistant managers and sales specialists through an incentive
compensation program. Under the Company's incentive compensation program, the
base salary of most team members engaged in the sale of Automotive Products,
particularly district managers and store managers, is augmented by incentive
compensation which is based upon the achievement of sales and profitability
goals. Such sales and profitability goals are based upon the performance of an
individual store or district in which the team member performs services. The
Company believes that its incentive compensation program significantly increases
the motivation and overall performance of its Professional Parts People and the
Company's ability to attract and retain qualified management and other
personnel. Most of the Company's current senior management, district managers
and store managers were promoted to their positions from within the Company.
Most members of senior management have at least 20 years experience with the
Company, and district managers and store managers have an average length of
service with the Company of approximately eight years and six years,
respectively.
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Marketing and Products
Marketing to the Professional Installer. Throughout its history, the
Company has been a seller of Automotive Products to the Professional Installer.
The Company considers this portion of its business to be an integral part of its
entire business strategy and devotes substantial time and energy to the
development of its Professional Installer business. The Company's Director of
Sales is primarily responsible for the development and maintenance of the
Company's Professional Installer business. There are 36 full time O'Reilly sales
representatives strategically located in the more densely populated market areas
served by the Company dedicated solely to calling upon and selling to the
Professional Installer. Moreover, each district manager and store manager
participates in these activities by calling upon existing and potential new
Professional Installers on a regular and periodic basis. Most of the O'Reilly
stores operate one or more small trucks or vans in order to provide prompt
delivery service to the Professional Installer. In addition, many O'Reilly
stores provide a dedicated counter to serve Professional Installers. In order to
promote the Professional Installer portion of its business, the Company provides
various services of special interest to the Professional Installer. For example,
the Company provides trade credit for qualified Professional Installers and
sponsors seminars concerning topics of interest to Professional Installers, such
as technical updates, safety and general business management.
Marketing to the Independently Owned Parts Store. Along with the operation
of the distribution centers and the distribution of Automotive Products to the
O'Reilly stores, Ozark also sells Automotive Products to independently owned
parts stores whose retail stores are generally located in areas not serviced by
an O'Reilly store. The Company generally does not compete with any independently
owned parts store to which it sells Automotive Products, but has, on occasion,
acquired the business assets of an independently owned parts store supplied by
Ozark. Ozark operates its own separate marketing program to independently owned
parts stores through a staff of five. Of the approximately 59 independently
owned parts stores currently purchasing Automotive Products from Ozark, 51
participate in the Auto Value(R) program through Ozark. As a participant in this
program, an independently owned parts store which meets certain minimum
financial and operational standards is permitted to indicate its Auto Value(R)
membership through the display of the Auto Value(R) logo, which is owned by Auto
Value Associates, Inc. ("Auto Value Associates"), a non-profit buying group
consisting of 50 members as of December 31, 1996, including the Company, engaged
in the distribution or sale of Automotive Products. Additionally, the Company
provides advertising and promotional assistance to Auto Value(R) stores
purchasing Automotive Products from Ozark, as well as marketing and sales
support. In return for a commitment to purchase Automotive Products from Ozark,
the Company offers assistance to an Auto Value(R) independently owned parts
store by providing loan guarantees and financing secured by inventory, furniture
and fixtures, making available computer software for inventory control and
performing certain accounting and bookkeeping functions.
Pricing. The Company believes that a competitive pricing strategy is
essential within all product categories in order to compete successfully. The
Company's pricing is established by senior management, with input from store
management, in a manner designed to meet product prices charged by the Company's
competitors in the market. To assure competitive pricing, the Company has
established its Right Part, Right Price, Right Now(R) policy under which each
O'Reilly store, at the request of a customer, will match any verifiable price on
any in-stock product of the same or comparable quality. Most Automotive Products
sold by the Company are priced at discounts from the manufacturer's suggested
prices and additional savings are offered through volume discounts. Special
promotions are also offered to attract customers, particularly the DIY customer,
to the O'Reilly stores, which special promotions are often times supported
through newspaper and electronic advertising and through the use of special
flyers.
Advertising and Promotion. The Company aggressively promotes sales to
consumers through an extensive advertising program which includes direct mail,
newspaper and radio advertising and some television advertising in selected
markets. The Company believes that its advertising and promotional activities
have resulted in significant name recognition in each of its market areas.
Newspaper advertisements are generally directed towards specific product and
price promotions, frequently in connection with specific sale events and
promotions. Total advertising expenses (excluding amounts received from
suppliers as allowances), have decreased from approximately 1.4% in 1995 to
approximately 1.2% of product sales in 1996.
Products and Purchasing. Aided by the Company's computerized inventory
control and management system, the product selection and purchasing functions
are managed centrally at the Company's executive offices. The Company's
merchandise generally consists of nationally recognized, well advertised, name
brand products such as A.C. Delco, Moog, Wagner, Gates Rubber, Federal Mogul,
Monroe, Prestone, Quaker State, Pennzoil, Castrol, Valvoline, STP, Armor All and
Turtle Wax. In
-8-
<PAGE>
addition to name brand products, O'Reilly stores carry a wide variety of high-
quality private label products under its SuperStart(R), BrakeBest(R), Ultima(R)
and Omnispark(R) proprietary name brands, and the Parts Master(R) name brand
(which are provided through Auto Value Associates). Because most of such
products are produced by nationally recognized manufacturers in accordance with
the Company's specifications, the Company believes that the private label
products are of equal or, in some cases, better quality than comparable name
brand products, a characteristic which is important to the Company's
Professional Installer clientele. The Company further believes that the private
label products are packaged attractively to promote customer interest and are
generally priced below comparable name brand products carried in the store.
Although the Company is not obligated to make purchases through Auto Value
Associates, Auto Value Associates assists the Company in negotiating purchases
of Automotive Products from a variety of vendors (including purchases of Parts
Master(R) products). Because of its volume purchases of Automotive Products, the
Company believes that its long-term ability to buy Automotive Products on
favorable terms would not be materially adversely affected if the Company ceased
to be a member of Auto Value Associates. The Company believes, however, that its
membership in Auto Value Associates provides certain benefits, and does not
currently intend to terminate its membership therein.
The Company purchases Automotive Products from approximately 350 vendors,
the three largest of which accounted for approximately 15% of the Company's
total purchases in fiscal 1996 and none of which accounted for more than 10% of
such purchases. The Company has no long-term contractual commitments with any of
its vendors. The Company has not experienced difficulty in obtaining
satisfactory alternative sources of supply for Automotive Parts, and believes
that adequate sources of supply exist at substantially similar costs, for
substantially all Automotive Products sold by the Company. The Company considers
its relationships with its suppliers to be good. Manufacturers of Automotive
Products, particularly hard parts, typically provide repair and replacement
warranties which are passed on by the Company to its customers. However, the
Company does provide warranties on a few product lines. The Company's Automotive
Product vendors generally permit the Company to return any slow moving or
obsolete inventory for a full credit. It is the Company's policy to take
advantage of early payment and seasonal purchasing discounts offered by its
vendors, and to utilize extended dating terms available from vendors due to
volume purchasing.
Competition
The Company believes that while the industry is still highly fragmented,
the ability of national and regional specialty retail chains, such as the
Company, to operate more efficiently than the smaller independent operator or
mass merchandiser will result in industry consolidation. The Company believes
that automotive specialty chains are able to operate more efficiently than small
or less specialized competitors because of economies of scale and internal
efficiencies, particularly in the areas of purchasing, distribution, inventory
management and advertising. The Company also believes that staffing sales
positions with technically proficient sales personnel is essential to meet the
needs of purchasers of today's more sophisticated and complex automotive parts
and that such staffing differentiates the specialty retailer from the less
specialized mass merchandiser. The Company believes that specialty retail
chains, such as the Company, which have the financial resources to provide for
such internal efficiencies and the ongoing training required to ensure the
staffing of technically proficient sales personnel, are well positioned to gain
market share from the smaller independent operators and mass merchandisers.
The Company competes in both the DIY and Professional Installer portions of
the automotive aftermarket business. Competitors in the DIY portion of its
business within its current market areas (primarily in the more densely
populated market areas) include automotive parts chains such as AutoZone,
Western Auto and Pep Boys, independently owned parts stores (some of which are
associated with national auto parts distributors or associations), automobile
dealerships and mass or general merchandise, discount and convenience chains
that carry Automotive Products. The Company's major competitors in the
Professional Installer portion of its business include independent warehouse
distributors and independently owned parts stores, automobile dealers and
national warehouse distributors and associations, such as National Automotive
Parts Association (NAPA), Carquest and Parts Plus. AutoZone entered into
certain of the Company's Professional Installer markets in 1996. The Company
competes on the basis of price, merchandise selection and availability, store
location and customer service. The Company believes that its principal strengths
are its ability to provide both the DIY and Professional Installers same day or
overnight availability to more than 105,000 SKUs through its highly motivated
and technically proficient Professional Parts People. However, some of the
Company's current and potential competitors are larger than the Company and have
greater financial resources than the Company.
-9-
<PAGE>
Employees
As of December 31, 1996, the Company had 3,337 team members, of whom 2,484
were employed at the O'Reilly stores, 523 were employed at the distribution
centers and 330 were employed at the corporate and administrative headquarters.
The Company's team members are not subject to a collective bargaining agreement.
The Company considers its relations with its team members to be excellent, and
strives to promote good employee relations through various programs designed for
such purposes.
Servicemarks and Trademarks
The Company has registered the servicemarks O'Reilly Automotive(R),
O'Reilly Auto Parts(R), Right Part, Right Price, Right Now(R), Because It's Your
Car We're Talking About(R) and Parts Payoff(R) and the trademarks SuperStart(R),
BrakeBest(R), Ultima(R) and Omnispark(R). Further, the Company is licensed to
use the registered trademarks and servicemarks Auto Value(R) and Parts Master(R)
in connection with its marketing program, which marks are owned by Auto Value
Associates. The Company believes that its business is not otherwise dependent
upon any patent, trademark, servicemark or copyright.
Regulation
Although subject to various laws and governmental regulations relating to
its business, including those related to the environment, the Company does not
believe that compliance with such laws and regulations has a material adverse
effect on its operations. Further, the Company is unaware of any failure to
comply with any such laws and regulations which could have a material adverse
effect on its operations. No assurance can be given, however, that significant
expenses could not be incurred by the Company to comply with any such law or
regulation in the future.
ITEM 2 PROPERTIES
- ---------------------
The following table provides certain information with respect to the
Company's headquarters and distribution centers:
<TABLE>
<CAPTION>
Square
Location Principal Use(s) Footage Interest
-------- ---------------- ------- --------
<S> <C> <C> <C>
Springfield, MO Executive and Administrative Offices 256,000(a)(b) Owned
and Distribution Center
Springfield, MO Administrative Offices, 25,000 Leased(c)
Training and Research
Springfield, MO Bulk Merchandise Warehouse 36,000 Owned
Kansas City, MO Distribution Center 113,000(a) Owned
Oklahoma City, OK Distribution Center 123,000(a) Owned
- -----------------------
</TABLE>
(a) Includes mezzanine space.
(b) Includes 212,000 square feet (including mezzanine space) utilized by the
Company for its distribution center.
(c) Occupied under the terms of a lease expiring in 2014 with an unaffiliated
party, subject to renewal for a term of 10 years at the option of the
Company. To facilitate construction, the Company loaned to the owner of the
facility an aggregate of approximately $1.6 million. The principal balance
of such loan bears interest at a rate of six percent per annum, is payable
in equal monthly installments through January 2005 and is secured by a
first deed of trust.
Of the 219 stores operated by the Company at December 31, 1996, 81 stores
were owned, 84 stores were leased from unaffiliated parties and 54 stores were
leased from one of two real estate investment partnerships formed by the
O'Reilly family. Leases with unaffiliated parties generally provide for payment
of a fixed base rent, payment of certain tax, insurance and
-10-
<PAGE>
maintenance expense, and an original term of ten years, subject to one or more
renewals at the option of the Company. The original terms of 39 stores leased
from unaffiliated parties expire prior to the end of 1998. The Company has
entered into separate master lease agreements with each of the affiliated real
estate investment partnerships for the occupancy of the stores covered thereby.
Such master lease agreements expire on December 31, 1998, subject to renewal at
the option of the Company for an additional period of up to six years.
The Company believes that its present facilities are in good condition, are
adequately insured and together with those under construction, are suitable and
adequate for the conduct of its current operations.
ITEM 3 LEGAL PROCEEDINGS
- -------------------------
The Company is not a party to any legal proceedings, other than routine claims
and lawsuits arising in the ordinary course of its business. The Company does
not believe that such claims and lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's business.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 1996.
ITEM 4A EXECUTIVE OFFICERS OF THE COMPANY
- ------------------------------------------
The following paragraphs set forth certain information with respect to the
executive officers of the Company, who are not also directors:
Ted F. Wise, age 46, Executive Vice-President, has served in this capacity since
February, 1997. Prior to his current position, Mr. Wise had served as Senior
Vice-President from March, 1993 until February, 1997 and as Vice-President-
Operations from June, 1984 until March, 1993.
James R. Batten, CPA, age 34, Chief Financial Officer, has served in this
capacity since March, 1994. Mr. Batten previously held the position of Finance
Manager of the Company from January, 1993 until being elected to his current
position. From September, 1986 until joining the Company in January, 1993, Mr.
Batten was employed by the accounting firm of Whitlock, Selim & Keehn where he
attained the position of Audit Manager in 1991.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The material contained in the registrant's annual report to its shareholders
(the "Annual Shareholders' Report") under the captions "Market Prices and
Dividend Information" and "Number of Stockholders" included on page 27, is
incorporated herein by this reference.
ITEM 6 SELECTED FINANCIAL DATA
- -------------------------------
The material contained in the Annual Shareholders' Report under the caption
"Selected Consolidated Financial Data" included on page 10 and 11, is
incorporated herein by this reference.
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
The material contained in the Annual Shareholders' Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included on page 12, is incorporated herein by this reference.
-11-
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The Company's consolidated financial statements, the notes thereto and the
report of Ernst and Young LLP, independent auditors, appearing in the Annual
Shareholders' Report under the captions "Consolidated Financial Statements",
"Notes to Consolidated Financial Statements" and "Report of Independent
Auditors" included on pages 16 through 26, are incorporated herein by this
reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The information regarding the directors of the Company contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders ("the
Proxy Statement") under the caption "Election of Directors" is incorporated
herein by this reference. The Proxy Statement is being filed with the
Securities and Exchange Commission within 120 days of the end of the Company's
most recent fiscal year end. The information regarding executive officers called
for by item 401 of Regulation S-K is included in Part I as Item 4A, in
accordance with General Instruction G(3) to Form 10-K, for the executive
officers of the Company who are not also directors.
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 included in the Company's Proxy Statement under the caption
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" is
incorporated herein by this reference.
ITEM 11 EXECUTIVE COMPENSATION
- -------------------------------
The material in the Proxy Statement under the caption "Executive Compensation"
other than the material under the caption "Report of the Compensation Committee"
is incorporated herein by this reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The material in the Proxy Statement under the caption "Security Ownership of
Management and Certain Beneficial Owners" is incorporated herein by this
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The material in the Proxy Statement under the caption "Transactions with
Insiders and Others" is incorporated herein by this reference.
-12-
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
- -----------------------------------------------------------------------
(a) 1. Financial Statements-O'Reilly Automotive, Inc. and Subsidiaries
---------------------------------------------------------------
The following consolidated financial statements of O'Reilly Automotive,
Inc. and Subsidiaries included in the Annual Shareholders' Report of the
registrant for the year ended December 31, 1996, are incorporated herein by
this reference in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements for the years ended December
31, 1996, 1995 and 1994.
Report of Independent Auditors
(a) 2. Financial Statement Schedule-O'Reilly Automotive, Inc. and Subsidiaries
-----------------------------------------------------------------------
The following consolidated financial statement schedule of O'Reilly
Automotive, Inc. and subsidiaries is included in Item 14(d):
Schedule II-Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(a) 3. Exhibits
--------
See Exhibit Index on pages 16 through 17 of this report.
(b) Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the last quarter of
the year ended December 31, 1996.
-13-
<PAGE>
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL.D COL. E
ADDITIONS
DESCRIPTION Balance at Beginning (1) (2) Deductions-Describe Balance at End
of period Charged to Costs Charged to Other of Period
and Expenses Accounts-Describe
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $386 $592 $0 $534(1) $444
Year Ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $293 $467 $0 $374(1) $386
Year Ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts $240 $307 $0 $254(1) $293
</TABLE>
(1) Uncollectible accounts written off.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
O'REILLY AUTOMOTIVE, INC.
(Registrant)
Date: March 27, 1997 By /s/ David E. O'Reilly
---------------------------
David E. O'Reilly
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David E. O'Reilly Director, President and Chief March 27, 1997
- ---------------------------- Executive Officer (principal
David E. O'Reilly executive officer)
/s/ James R. Batten Chief Financial Officer March 27, 1997
- ---------------------------- (principal financial and
James R. Batten accounting officer)
/s/ Lawrence P. O'Reilly Director March 27, 1997
- ----------------------------
Lawrence P. O'Reilly
/s/ Charles H. O'Reilly, Jr. Director March 27, 1997
- ----------------------------
Charles H. O'Reilly, Jr.
/s/ Rosalie O'Reilly Wooten Director March 27, 1997
- ----------------------------
Rosalie O'Reilly Wooten
- ---------------------------- Director March 27, 1997
Charles H. O'Reilly, Sr.
- ---------------------------- Director March 27, 1997
Paul Lederer
- ---------------------------- Director March 27, 1997
Joe C. Greene
</TABLE>
-15-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------
<S> <C>
2.1* Plan of Reorganization Among the Registrant, Greene
County Realty Co. ("Greene County Realty") and
Certain Shareholders.
3.1* Restated Articles of Incorporation of the
Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
4.1* Form of Stock Certificate for Common Stock.
10.1* Form of Employment Agreement between the
Registrant and David E. O'Reilly, Lawrence P.
O'Reilly, Charles H. O'Reilly, Jr. and Rosalie
O'Reilly Wooten.
10.2* Lease between the Registrant and O'Reilly
Investment Company.
10.3* Lease between the Registrant and O'Reilly Real
Estate Company.
10.7 (a) O'Reilly Automotive, Inc. Profit Sharing and
Savings Plan, filed as Exhibit 4.1 to the
Registration Statement of the Company on Form
S-8, File No. 33-73892, and incorporated herein by
this reference.
10.8* (a) O'Reilly Automotive, Inc. 1993 Stock Option Plan.
10.9* (a) O'Reilly Automotive, Inc. Stock Purchase Plan.
10.10* (a) O'Reilly Automotive, Inc. Director Stock Option
Plan.
10.11* Commercial and Industrial Real Estate Sale
Contract between Westinghouse Electric Corporation
and Registrant.
10.12* Form of Assignment, Assumption and Indemnification
Agreement between Greene County Realty and
Shamrock Properties, Inc.
10.13 Loan commitment and construction loan agreement
between the Company and Deck Enterprises, filed as
Exhibit 10.13 to the Company's Annual
Shareholders' Report on Form 10-K for the year
ended December 31,1993.
</TABLE>
-16-
<PAGE>
<TABLE>
<S> <C>
10.14 Lease between the Company and Deck Enterprises,
filed as Exhibit 10.14 to the Company's Annual
Shareholders' Report on Form 10-K for the year
ended December 31, 1993.
10.15 Revolving Credit and Term Loan Agreement between
the Registrant and Commerce Bank, N.A.
(Springfield, Missouri) dated May 19, 1995, filed
as Exhibit 10.15 to the Company's Quarterly Report
on Form 10Q for the quarter ended June 30, 1995.
10.16 Promissory Note between the Registrant and
Boatmen's Bank of Southern Missouri dated June 1,
1996, filed as Exhibit 10.17 to the Company's
Quarterly Report on Form 10Q for the quarter ended
June 30, 1996.
10.17 Amended Employment Agreement between the
Registrant and Charles H. O'Reilly, Jr., filed
herewith.
10.18 (a) O'Reilly Automotive, Inc. Performance Incentive
Plan, filed herewith.
11.1 Computation of Earnings Per Share, filed herewith.
13.1 1996 Annual Report to Shareholders, filed
herewith. Portions not specifically incorporated
by reference in this Report are not deemed "filed"
for the purposes of the Securities Exchange Act of
1934.
21.1 Subsidiaries of the Company, filed herewith.
23.1 Consent of Ernst & Young LLP, independent
auditors, filed herewith.
27.1 Financial Data Schedule, filed herewith.
99.1 Certain Risk Factors, filed herewith.
</TABLE>
- -----------
* Previously filed as Exhibit of same number to the Registration Statement
of the Company on Form S-1, File No. 33-58948, and incorporated herein by
this reference.
(a) Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
-17-
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 10.17 - Amended Form of Employment Agreement between Registrant and
Charles H. O'Reilly, Jr.
AMENDMENT TO
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT ("Amendment") is
effective as of the 1st day of January, 1995 by and between O'REILLY
AUTOMOTIVE, INC., a Missouri corporation (the "Company") and Charles H.
O'Reilly, Jr., an individual currently residing in Springfield, Missouri (the
"Executive"):
WHEREAS, the Company and the Executive entered into an Executive
Employment Agreement dated as of January 1, 1995 (the "Employment
Agreement");
WHEREAS, paragraph 3 of the Employment Agreement provides for an
annual base salary (the "Annual Base Salary") of Two Hundred Twenty
Thousand Dollars ($220,000), which Annual Base Salary is based upon the
full-time employment of the Executive;
WHEREAS, at the request of the Executive, the Company and the
Executive have agreed that effective January 1, 1995, the work week of the
Executive be reduced from a five-day week to a four-day week, and that the
Annual Base Salary of the Executive be reduced proportionately to reflect
such reduced work week;
WHEREAS, consistent with such agreement, since January 1, 1995, the
Executive has been performing services on behalf of the Company on a four-
day week basis, and the Company has been paying to the Executive an Annual
Base Salary of One Hundred Seventy-Six Thousand Dollars ($176,000); and
WHEREAS, the parties hereto desire to set forth in writing their
agreement with respect to the Executive's reduced work week and Annual
Base Salary.
NOW, THEREFORE, it is hereby agreed that, effective as of January 1,
1995, the Employment Agreement shall be amended as follows:
1. The first sentence of paragraph 3 of the Executive Employment
Agreement is hereby deleted in its entirety, and the following substituted
in lieu thereof:
"For all services rendered by the
Executive, the Company shall pay to the
Executive a base salary of One Hundred
Seventy-Six Thousand Dollars ($176,000)
payable in equal monthly installments in
advance on the first of each month."
2. Paragraph 2 (a) (ii) of the Employment Agreement is hereby deleted
in its entirety, and the following substituted in lieu thereof:
"(ii) In no event shall the Base Salary be
less that One Hundred Seventy-Six Thousand
Dollars ($176,000) per year."
1
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 10.17 - Amended Form of Employment Agreement between Registrant and
Charles H. O'Reilly, Jr. (continued)
3. A new sentence shall be added to paragraph 4 of the Employment
Agreement, which new sentence shall constitute the last sentence of said
paragraph 4, to read as follows:
"In no event shall the Executive be required to
perform services hereunder for more that four
days in any calendar week, and the Executive
shall not be required to work more that the
normal eight hour day during any such working
day."
4. Except to the extent amended hereby, the Company and the Executive
hereby ratify and confirm all of the provisions of the Executive Employment
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and date first above written.
O'REILLY AUTOMOTIVE, INC.
By: /s/ David E. O'Reilly
--------------------------
"Company"
/s/ Charles H. O'Reilly, Jr.
-----------------------------
"Executive"
2
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 10.18 - Performance Incentive Plan
PERFORMANCE INCENTIVE PLAN
I. Purpose.
The purpose of the O'Reilly Performance Incentive Plan is to provide
additional incentive to the Participants to remain in the employ of the Company
and to compensate them for their accomplishment of individual and departmental
goals, and for their contribution to the financial performance of the Company.
II. Definitions.
"Award Date" means, with respect to any Target Award, the date on which
such Target Award is granted by the committee.
"Award Year" means, with respect to any Target Award, the Year in which
such Target Award is granted by the committee.
"Board" means the Board of Directors of O'Reilly Automotive, Inc.
"Bonus" means the amount, expressed in dollars, to be earned by the
Participant who receives a Target Award, subject to the achievement of the
Criteria.
"Committee" means the Executive Committee of the Board.
"Common Stock" means the $.01 par value common stock of O'Reilly
Automotive, Inc.
"Company" means collectively, O'Reilly Automotive, Inc. and its
subsidiaries, currently consisting of Ozark Automotive Distributors, Inc.,
Greene County Realty Co. and O'Reilly II Aviation, Inc.
"Criteria" means, with respect to each Participant, the specific goals and
objectives required to be met by the Company, department and/or individual
Participant in order to earn the Bonus which is the subject of the Target
Award.
"Disability" means the total and permanent disability of a Participant,
established to the reasonable satisfaction of the Committee.
"Escrow Agent" means the Boatmen's Trust Company.
"Escrow Agreement" means the agreement among the Company, the Escrow Agent
and the Participant providing for the deposit of certificates representing
Restricted Stock in escrow to be held by the Escrow Agent pending the
expiration or earlier termination of the Forfeiture Period, which agreement
shall be in the form attached hereto as Exhibit A.
"Expiration Date" means, with respect to Restricted Stock (or portion(s)
thereof), the date determined by the Committee upon which the forfeiture
provisions of Section V.B. hereof shall lapse, and in absence of such
determination, the dates prescribed in Section V.C. hereof.
"Fair Market Value" means, with respect to a share of Restricted Stock, the
average of the highest and lowest sale prices of the Common Stock, as
reported on the NASDAQ National Market System, for the day immediately
preceding the Award Date.
1
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 10.18 - Performance Incentive Plan (continued)
"Forfeiture Period" means, with respect to Restricted Stock, that period
commencing on the date of the issuance of such Restricted Stock to the
Participant and ending on the first to occur of (i) the Expiration Date, or
(ii) the occurrence of a Qualifying Event.
"Participant" means an employee of the Company at the management level who
is approved by the Committee to participate in the Plan.
"Plan" means the O'Reilly Automotive, Inc. Performance Incentive Plan.
"Qualifying Event" means those events specified in Section V.D. hereof.
"Restricted Stock" means shares of the Common Stock issued to Participants
pursuant to the Plan, which shares shall be subject to the risk of
forfeiture as provided in Section V.B. hereof during the Forfeiture Period.
"Target Award" means the award by the Committee to a Participant of the
right to receive a Bonus, consisting of cash and Restricted Stock, subject
to the achievement during the Award Year in question of the Criteria.
"Target Award Notice" means the written notice of the committee of the
Target Award, specifying the amount of the Bonus, the Criteria to be met in
order to earn the Bonus, the Forfeiture Period(s) applicable to the
Restricted Stock (if different than as set forth in Section V.C. hereof)
and such other matters deemed relevant by the Committee.
"Year" means any 12-month period beginning January 1 and ending at midnight
on December 31 of each year.
III. Eligibility.
The Committee shall from time to time determine and designate Participants.
The Committee shall decide within sixty days from the beginning of each Year
whether to grant any Participant a Target Award under the Plan for that Year and
the amount of the Bonus granted, subject to the achievement by the Participant
and/or the Company of the Criteria. The Criteria shall be (i) established from
time to time by the Committee, (ii) in writing, and (iii) provided to each
Participant simultaneously with delivery to the Participant of the Target Award
Notice. In adopting such Criteria, the Committee may take into account: (1) each
Participant's individual performance, including the achievement of specified
departmental goals; (2) the Company's performance, including specified
financial goals; and (3) any other factors that the Committee may consider
relevant. The Committee shall advise the Participant and the Company of each
Target Award by delivery of a target Award Notice as soon as practicable
following the grant of the Target Award. The Participant shall execute the
Target Award Notice indicating his or her receipt thereof and agreement to be
bound by the terms and provisions thereof and the Plan. Such execution shall
also evidence and shall be deemed such Participant's execution of the Escrow
Agreement, to be effective upon the issuance of shares of Restricted Stock.
IV. Method of Payment.
Bonuses, to the extent earned by a Participant under the terms of the
Criteria, shall be paid to Participants only if such Participants are employed
by the Company on December 31st of the Award Year. Two-thirds of such Bonus
shall be payable in cash and one-third in shares of Restricted Stock having a
Fair Market Value equal to the one-third of the amount of the Bonus (subject to
rounding, as provided below). Additionally:
A. Participants shall receive their Bonuses, subject to all applicable
withholding for taxes and other items, within thirty (30) days of the completion
of the annual audit of the financial statements of the Company for the Award
Year.
2
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 10.18 - Performance Incentive Plan (continued)
B. Any fractional share of Restricted Stock resulting from the calculation
of Fair Market Value of the Restricted Stock portion of the Bonus will be
rounded down to the nearest whole number, and the Participant's cash portion of
the Bonus will be increased by an amount equal to the value of the fractional
remainder. No shares will be issued for fractional amounts of shares.
C. If a Participant becomes Disabled or dies during any Award Year, the
Committee may elect to pay a pro rata portion of his or her Bonus, to the extent
ultimately earned by achievement of the applicable Criteria, entirely in cash to
the Participant or his or her estate. If a Participant resigns following the end
of an Award Year but prior to the date Bonuses are to be paid for the Award
Year, the Participant will be entitled to receive only the cash portion of any
Bonus earned (e.g., two-thirds of the total Bonus).
V. Restrictions on Transferability; Forfeiture.
A. Upon payment of a Bonus, the shares of Restricted Stock shall be duly
transferred to the Participant and a certificate or certificates for such shares
shall be issued in the Participant's name. The Participant shall thereupon be a
shareholder with respect to all of the shares represented by such certificate or
certificates and shall have all of the rights other shareholders with respect to
all such shares, including the right to vote such shares and to receive all the
dividends and other distributions (subject to the provisions of Section VII
hereof) paid with respect to such shares, provided, however, that such shares
shall be subject to the restrictive and forfeiture provisions hereinafter set
forth. Certificates representing shares of Restricted Stock shall be imprinted
with a legend to the effect that the shares represented thereby may not be sold,
exchanged, transferred, pledged, hypothecated or otherwise disposed of except in
accordance with the terms of this Plan. The Participant, immediately upon
receipt of such certificate(s), shall deposit such certificate(s) together with
a stock power or other instrument of transfer, appropriately endorsed in blank,
with the Escrow Agent to be held pursuant to the Escrow Agreement, with the
expenses of such escrow to be borne by the Company.
B. During the Forfeiture Period, shares of Restricted Stock to which the
Forfeiture Period applies shall be subject to the following:
1. None of such restricted Stock shall be sold, exchanged, transferred,
pledged, hypothecated, or otherwise disposed of; and
2. If, at any time during the Forfeiture Period, the employment of the
Participant with the Company ceases for any reason other than the
occurrence of a Qualifying Event, then all Restricted Stock awarded
hereunder to a Participant then subject to a Forfeiture Period shall
thereupon automatically, and without further action on the part of the
Company, be forfeited by the Participant, and all such Restricted Stock
shall thereupon be reconveyed, transferred and assigned to the Company.
C. The provisions of Section V.B. hereof with respect to the
nontransferability and forfeiture of Restricted Stock shall lapse as to such
Restricted Stock upon the expiration of the Forfeiture Period as to which such
shares of Restricted Stock are subject, whereupon such provisions will be of no
force and effect. The Committee, in its discretion, may determine on the Award
Date the Forfeiture Period or Forfeiture Periods applicable to the Restricted
Stock which are the subject of the Target Award. In absence of such
determination by the Committee, the Expiration Dates for the Forfeiture Periods
applicable to such Restricted Stock shall be as follows:
1. The Expiration Date applicable to one-third of the total number of
shares of Restricted Stock issued pursuant to a Target Award, rounded up to
the nearest whole share, shall be December 31st of the Year immediately
following the Award Year of such Target Award;
2. The Expiration Date applicable to an additional one-third of the total
number of such shares of Restricted Stock, rounded downward to the nearest
whole share shall be December 31st of the second year following such Award
Year; and
3
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 10.18 - Performance Incentive Plan (continued)
3. The Expiration Date applicable to the remaining shares of Restricted
Stock shall be December 31st of the third year following such Award Year.
D. The following shall constitute a Qualifying Event:
1. the retirement of Participant with fifteen (15) or more years
of service.
2. the retirement of a Participant at age sixty (60) or older; or
3. the death or Disability of a Participant.
VI. Shares Subject to Plan.
Subject to the provisions of Section VII, the maximum number of shares of
Common Stock that may be issued under this Plan shall not exceed, in the
aggregate, 100,000 shares. Such shares may be unissued shares, or issued shares
that have been reacquired. If any shares of Restricted Stock are forfeited
during the Forfeiture Period, such shares shall not be available again for grant
under the Plan.
VII. Adjustment Upon Changes in Stock.
If any change is made in the Common Stock by reason of any merger,
consolidation, reorganization, recapitalization, stock dividend, split-up,
combination of shares, exchange of shares, change in corporate structure, or
otherwise, the Committee shall make an appropriate adjustment to the kind and
maximum number of shares subject to the Plan. Any additional shares, or rights
to acquire shares, that result from such an adjustment shall be subject to the
same restrictions that apply to the Participant's Restricted Stock previously
received pursuant to the Plan and shall be deposited with the Escrow Agent to be
held by the Escrow Agent pending the expiration or earlier termination of the
Forfeiture Period applicable thereto. No fractional shares of Common Stock shall
be issued under the Plan on account of any such adjustment, and a Participant's
interest in the shares resulting from such an adjustment shall always be limited
to the lower number of whole shares that result from the adjustment.
VIII. Administration.
The Plan shall be administered by the Committee. The day-to-day
administrative responsibilities may be delegated to other officers or employees
designated by the Committee. The decisions of the Committee as to the facts in
any case arising relative to the Plan, and the meaning and intent of any
provision of the Plan, or its application, shall be final and conclusive.
IX. Limitations.
No officer or employee of the Company shall at any time have any right to
receive a Target Award hereunder, and neither the action of O'Reilly
Automotive, Inc. in establishing the Plan, nor any action taken by it or by the
Board or the Committee under the Plan, nor any provision of the Plan, shall be
construed as giving any officer or employee of the Company or any other person
the right to be retained or employed by the Company.
X. Amendment; Termination.
At any time and from time to time, the Board may elect to alter, amend or
modify this Plan, terminate the Plan, change the participation requirements for
the Plan, or make other such changes to the Plan or the Escrow Agreement as the
Board deems necessary and appropriate; provided, however, that no such
alteration, amendment or modification shall adversely affect the rights of any
Participant with respect to any Target Award then granted or shares of
Restricted Stock then subject to the Escrow Agreement.
4
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 10.18 - Performance Incentive Plan (continued)
XI. Rules of Construction.
The terms of the Plan shall be construed in accordance with the laws
of the State of Missouri.
XII. Effective Date.
The Plan shall become effective as of January 1, 1995.
5
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 11.1 - Computation of Earnings per Share
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income $18,971 $14,091 $11,072
=============================
Weighted average common shares outstanding (1) 10,432 8,910 8,655
=============================
Net income per share $ 1.82 $ 1.58 $ 1.28
=============================
</TABLE>
(1) Common stock equivalents are insignificant for both primary and fully
diluted earnings per share.
1
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
INCOME STATEMENT DATA:
Product sales $259,243 $201,492 $167,057 $137,164 $110,147 $94,937 $82,372 $71,935 $59,728
Cost of goods sold, including
warehouse and distribution
expenses 150,772 116,768 97,758 82,102 65,066 56,255 50,027 44,930 36,246
- --------------------------------------------------------------------------------------------------------------------
Gross profit 108,471 84,724 69,299 55,062 45,081 38,682 32,345 27,005 23,482
Operating, selling, general
and administrative expenses 79,620 62,687 52,142 42,492 35,204 29,961 26,750 23,231 19,281
- --------------------------------------------------------------------------------------------------------------------
Operating income 28,851 22,037 17,157 12,570 9,877 8,721 5,595 3,774 4,201
Other income (expense), net 1,182 236 376 216 204 (104) (566) (367) (245)
Provision for income taxes 11,062 8,182 6,461 4,556 3,686 3,167 1,837 1,269 1,437
- --------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before
cumulative effects of
changes in accounting
principles 18,971 14,091 11,072 8,230 6,395 5,450 3,192 2,138 2,519
Cumulative effects of
changes in accounting
principles - - - - (163) - - - -
- --------------------------------------------------------------------------------------------------------------------
Income from continuing
operations 18,971 14,091 11,072 8,230 6,232 5,450 3,192 2,138 2,519
Income (loss) from
discontinued operations - - - 48 129 (68) (186) (49) 22
- --------------------------------------------------------------------------------------------------------------------
Net income $18,971 $14,091 $11,072 $ 8,278 $ 6,361 $ 5,382 $ 3,006 $ 2,089 $ 2,541
====================================================================================================================
Income per share from
continuing operations
before cumulative effects
of changes in accounting
principles $ 1.82 $ 1.58 $ 1.28 $1.00 $ 0.87 $ 0.74 $ 0.44 $ 0.29 $ 0.35
====================================================================================================================
Income per share from
continuing operations $ 1.82 $ 1.58 $ 1.28 $ 1.00 $ 0.84 $ 0.74 $ 0.44 $ 0.29 $ 0.35
Income (loss) per share from
discontinued operations - - - 0.01 0.02 (0.01) (0.03) - -
- --------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.82 $ 1.58 $ 1.28 $ 1.01 $ 0.86 $ 0.73 $ 0.41 $ 0.29 $ 0.35
====================================================================================================================
Cash dividends per share $ - $ - $ - $ - $0.0017 $0.0015 $0.0015 $0.0015 $0.0014
Weighted average common
shares outstanding 10,432 8,910 8,655 8,235 7,359 7,327 7,311 7,306 7,238
</TABLE>
1
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Selected Consolidated Financial Data (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SELECTED
OPERATING DATA)
SELECTED OPERATING DATA:
Number of stores at year
end (a) 219 188 165 145 127 116 112 106 98
Total store square footage
at year end (000's) (b) 1,155 923 785 671 571 511 480 427 386
Weighted average product
sales per store
(000's) (b) $1,238.5 $1,101.2 $1,007.1 $948.9 $837.8 $759.1 $690.3 $637.2 $592.2
Weighted average product
sales per square foot (b) $242.2 $227.3 $215.4 $208.7 $187.2 $174.4 $166.2 $160.0 $150.5
Percentage increase in
same-store product
sales (c) 14.4% 8.9% 8.9% 14.9% 11.4% 9.2% 11.2% 8.5% *
BALANCE SHEET DATA:
Working capital $ 74,403 $ 80,471 $ 41,416 $ 41,193 $ 15,251 $13,434 $11,634 $ 9,853 $ 9,378
Total assets 183,623 153,604 87,327 73,112 58,871 49,549 46,148 45,200 31,620
Short-term debt 3,154 231 311 495 3,462 1,298 2,281 3,897 3,341
Long-term debt, less
current portion 237 358 461 732 2,668 3,326 5,082 5,684 5,475
Long-term debt related
to discontinued
operations, less current
portion - - - - 9,873 10,316 9,901 9,961 1,967
Stockholders' equity 155,782 133,870 70,224 57,805 29,281 22,881 17,480 14,471 12,346
</TABLE>
* Because the Company was in the process of upgrading its accounting system,
certain data required to provide comparable store product sales information
for 1988 is not available.
(a) The number of stores at year end 1991 and 1992 are net of the combination
in each such year of two stores located within one mile of each other. No
other stores were closed during the periods presented.
(b) Total square footage includes normal selling, office, stockroom and
receiving space. Weighted average product sales per store and per square
foot are weighted to consider the approximate dates of store openings or
expansions.
(c) Same-store product sales data are calculated based on the change in product
sales of only those O'Reilly stores open during both full periods being
compared. Percentage increase in same-store product sales is calculated
based on O'Reilly store sales results, which exclude sales of specialty
machinery, sales by outside salesmen and sales to employees.
2
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
The information discussed below in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains statements regarding
matters that are not historical facts (including statements as to beliefs or
expectations of O'Reilly Automotive, Inc. (the Company)) which are forward-
looking statements. Because such forward-looking statements include risks and
uncertainties, including those risks discussed in Exhibit 99.1 to the Company's
1996 Form 10-K, the Company's actual results could differ materially from those
discussed below.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the Company's financial condition, results of
operations and liquidity and capital resources should be read in conjunction
with the consolidated financial statements of the Company, related notes and
other financial information included elsewhere in this annual report.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data of the Company as a
percentage of product sales for the years included:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Product sales 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse
and distribution expenses 58.2% 58.0% 58.5%
- --------------------------------------------------------------------------------
Gross profit 41.8% 42.0% 41.5%
Operating, selling, general and
administrative expenses 30.7% 31.1% 31.2%
- --------------------------------------------------------------------------------
Operating income 11.1% 10.9% 10.3%
Other income 0.5% 0.1% 0.2%
- --------------------------------------------------------------------------------
Income before income taxes 11.6% 11.0% 10.5%
Provision for income taxes 4.3% 4.0% 3.9%
- --------------------------------------------------------------------------------
Net income 7.3% 7.0% 6.6%
================================================================================
</TABLE>
1996 COMPARED TO 1995
Product sales increased $57.8 million, or 28.7%, from $201.5 million in 1995 to
$259.2 million in 1996 due to the opening of 31 new O'Reilly stores during 1996
and a $25.8 million, or 14.4% increase in same store product sales. Management
believes that the consumer acceptance experienced by these new O'Reilly stores
and the increased product sales achieved by the existing O'Reilly stores is the
result of the continuation of media advertising by the Company during 1996 at
levels comparable to 1995, an increase in the broad selection of SKU's available
at the newer O'Reilly stores, the increase in inventory levels at most O'Reilly
stores, and the increasing penetration of the general geographic markets in
which the Company operates.
Gross profit increased 28.0% from $84.7 million (or 42.0% of product sales) in
1995 to $108.5 million (or 41.8% of product sales) in 1996. This decrease in
gross profit margin was primarily attributable to the continued price
competition among automotive parts retailers. The decrease was partially offset
by lower product costs resulting from increased volume discounts obtained by the
Company and other economies of scale achieved. Management believes that price
competition among national and regional automotive parts retailers will continue
to influence gross profit margins in 1997 and beyond.
Operating, selling, general and administrative expenses ("OSG&A expenses")
increased $16.9 million from $62.7 million (or 31.1%
3
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
of product sales) in 1995 to $79.6 million (or 30.7% of product sales) in 1996.
The increased dollar amount of OSG&A expenses resulted primarily from the new
store openings and additions to administrative staff and facilities which
occurred during 1996 in order to support the increased level of the Company's
operations. The decrease in OSG&A expenses as a percent of product sales in 1996
compared to 1995 was primarily due to economies of scale resulting from
increased product sales.
The Company's provision for income taxes increased from 36.7% of income before
income taxes in 1995 to 36.8% in 1996. The increase in the effective income tax
rate was primarily due to more of the Company's sales occurring in states with
higher income tax rates.
Principally as a result of the foregoing, net income in 1996 was $19.0 million
or 7.3% of product sales, an increase of $4.9 million (or 34.6%) from net income
in 1995 of $14.1 million, or 7.0% of product sales.
1995 COMPARED TO 1994
Product sales increased $34.4 million, or 20.6%, from $167.1 million in 1994 to
$201.5 million in 1995 due to the opening of 23 new O'Reilly stores during 1995
and a $12.9 million, or 8.9% increase in same store product sales. Management
believes that the consumer acceptance experienced by the new O'Reilly stores and
the increased product sales achieved by the existing O'Reilly stores resulted in
part from the increased use of media advertising by the Company during 1995.
Management also believes that these increases resulted in part from the
continued use of the new prototype store format which was introduced in 1994,
adjustments to the in-store SKU mix to reflect changes in consumer demand, and
the increase in inventory levels at most O'Reilly stores.
Gross profit increased 22.3% from $69.3 million (or 41.5% of product sales) in
1994 to $84.7 million (or 42.0% of product sales) in 1995. The increase in gross
profit margin was primarily attributable to lower product costs resulting from
increased volume discounts obtained by the Company and other economies of scale
achieved. These increases were partially offset by the continued price
competition among automotive parts retailers.
Operating, selling, general and administrative expenses increased $10.5 million
from $52.1 million (or 31.2% of product sales) in 1994 to $62.7 million (or
31.1% of product sales) in 1995. The increased dollar amount of OSG&A expenses
resulted primarily from the new store openings and additions to administrative
staff which occurred during 1995 in order to support the increased level of the
Company's operations.
The Company's provision for income taxes decreased from 36.9% of income from
continuing operations before income taxes in 1994 to 36.7% in 1995. The decrease
in the effective income tax rate was primarily due to more of the Company's
sales occurring in states with lower income tax rates.
Net income in 1995 was $14.1 million or 7.0% of product sales, an increase of
$3.0 million (or 27.3%) from net income in 1994 of $11.1 million, or 6.6% of
product sales.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $8.4 million in 1994, $.9 million
in 1995 and $4.9 million in 1996. The decrease in 1995 compared to 1994 is
principally the result of increases in accounts receivable, inventory and other
current assets partially offset by increases in net income and accounts payable.
The increase in inventory is primarily attributable to the addition of 23 new
stores, an increase in inventory levels at most O'Reilly stores and the
expansion of the Kansas City distribution center. The increase in 1996 compared
to 1995 is principally the result of increases in net income and accounts
payable, partially offset by increases in inventory and accounts receivable. The
increase in inventory is due to the addition of 31 new stores, an increase in
inventory levels at most O'Reilly stores and the opening of the Oklahoma City
distribution center.
Net cash used in investing activities was $8.3 million in 1994, $49.9 million in
1995 and $11.2 million in 1996. The increase in cash
4
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
used in 1995 was primarily the result of increased capital expenditures as well
as net purchases of short-term investments with a portion of the proceeds from
the Company's public offering of common stock which was completed in November,
1995. The decrease in cash used in 1996 was primarily due to an increase in the
net proceeds from the sale of short-term investments, net of purchases, offset
by increased capital expenditures.
Capital expenditures were $13.7 million in 1994, $28.6 million in 1995 and $34.5
million in 1996. These expenditures were primarily related to the opening of new
O'Reilly stores and remodeling existing O'Reilly stores. The Company opened 20
new stores and remodeled or relocated 18 stores during 1994. During 1995, the
Company opened 23 new stores and remodeled or relocated 21 stores. In 1996, the
Company opened 31 new stores and remodeled or relocated 32 stores. Also, in
1994, 1995 and 1996, the Company purchased real estate for new stores and store
relocations totaling approximately $3.5 million, $6.0 million and $7.8 million,
respectively. The Company purchased real estate for the Oklahoma City
distribution center totaling $.8 million in 1995. Construction costs for the
Oklahoma City distribution center, which was completed in March 1996, totaled
approximately $3.1 million.
The Company's store expansion program requires significant capital expenditures
and working capital principally for inventory requirements. The Company plans to
finance this expansion through cash expected to be provided from operating
activities and available short-term bank borrowings.
In November 1995, the Company sold 1,600,000 shares of Common Stock through a
public offering. The net proceeds from that offering amounted to $47.7 million.
A portion of the proceeds were used to repay the Company's outstanding
indebtedness under its bank credit facilities and the remainder was used to fund
the Company's expansion program during 1995 and 1996.
The Company has available an unsecured line of credit with The Boatmen's Bank of
Southern Missouri. Under the terms thereof, the Company may borrow up to $17.0
million until June 1997. Borrowings outstanding under the line of credit bear
interest at LIBOR plus 1.00% (6.53% as of December 31, 1996). At December 31,
1996, $2.5 million was outstanding under the line of credit.
The Company also has available an unsecured revolving credit facility with
Commerce Bank, N.A. of Springfield, Missouri. Under terms of this agreement, the
Company may borrow up to $15 million upon compliance with various minimum
financial ratios. This credit facility bears interest at LIBOR plus 1.25% (6.78%
at December 31, 1996) and matures in May 1997. At December 31, 1996, $.5 million
was outstanding under this credit facility.
The Company has entered into discussions with each of the banks providing such
credit facilities above to extend the terms and the amounts available under the
facilities. Management believes it can obtain an extension of the terms and an
increase in the maximum borrowings available under such credit facilities.
However, no assurances can be made that terms satisfactory to the Company can be
obtained.
Management believes that the Company's existing cash and short-term investments,
cash expected to be provided by operating activities, current and future bank
credit facilities available and trade credit will be sufficient to fund both the
short and long term capital and liquidity needs of the Company for the
foreseeable future.
INFLATION AND SEASONALITY
The Company has been successful, in many cases, in reducing the effects of
merchandise cost increases principally by taking advantage of vendor incentive
programs, economies of scale resulting from increased volume of purchases and
selective forward buying. As a result, management does not believe its
operations have been materially affected by inflation.
5
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Company's business is seasonal to some extent primarily as a result of the
impact of weather conditions on store sales. Store sales and profits have
historically been higher in the second and third quarters (April through
September) of each year than in the first and fourth quarters.
NEW ACCOUNTING STANDARDS
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
No. 121 also addresses the accounting for long-lived assets that are expected to
be disposed of. The effect of applying SFAS No. 121 was immaterial.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which encourages (but does not require) companies to adopt a fair
value based method of accounting for stock-based compensation plans, in place of
the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees." If the fair value based method of accounting is not adopted, SFAS
No. 123 requires companies to disclose pro forma calculations in the notes to
their financial statements of net income and net income per share as if the fair
value based method of accounting had been applied. The Company accounts for
their stock-based compensation plan in accordance with APB Opinion No. 25. The
effect of applying the fair value method required by SFAS No. 123 to the
Company's stock option awards results in net income and net income per share
that are not materially different from amounts reported in the consolidated
statements of income.
6
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Consolidated Balance Sheets
December 31, 1996 1995
- ------------------------------------------------------------------------------
(In Thousands, Except Share Data)
ASSETS
Current assets:
Cash $ 1,207 $ 2,833
Short-term investments (Note 2) 1,000 23,410
Accounts receivable, less allowance for doubtful
accounts of $444 in 1996 and $386 in 1995 11,296 9,460
Inventory 83,909 58,979
Deferred income taxes (Note 8) -- 530
Refundable income taxes 172 736
Other current assets 2,568 2,698
----------------------
Total current assets 100,152 98,646
----------------------
Property and equipment, at cost:
Land 19,954 12,400
Buildings 35,379 22,893
Leasehold improvements 8,082 6,194
Furniture, fixtures and equipment 29,311 21,281
Vehicles 8,494 5,623
----------------------
101,220 68,391
Accumulated depreciation 21,435 16,440
----------------------
79,785 51,951
Notes receivable 1,510 1,540
Other assets 2,176 1,467
----------------------
Total assets $183,623 $153,604
======================
7
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Consolidated Balance Sheets (continued)
December 31, 1996 1995
- --------------------------------------------------------------------------------
(In Thousands, Except Share Data)
Liabilities and stockholders' equity
Current liabilities:
Notes payable to banks (Note 4) $ 3,000 $ --
Accounts payable 17,288 13,013
Accrued expenses 3,953 3,123
Accrued payroll 1,043 1,808
Deferred income taxes (Note 8) 311 --
Current portion of long-term debt (Note 5) 154 231
--------------------------
Total current liabilities 25,749 18,175
Long-term debt, less current portion (Note 5) 237 358
Postretirement benefit obligation (Note 7) 403 391
Deferred income taxes (Note 8) 1,452 810
Stockholders' equity (Note 9):
Preferred stock, $.01 par value:
Authorized shares - 5,000,000
Issued and outstanding shares - none -- --
Common stock, $.01 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 10,468,507 in 1996
and 10,362,170 in 1995 105 104
Additional paid-in capital 73,964 71,024
Retained earnings 81,713 62,742
--------------------------
Total stockholders' equity 155,782 133,870
--------------------------
Total liabilities and stockholders' equity $183,623 $153,604
--------------------------
See accompanying notes.
8
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Thousands, Except Per Share Amounts)
Product sales $259,243 $201,492 $167,057
Cost of goods sold, including warehouse and distribution
expenses 150,772 116,768 97,758
Operating, selling, general and administrative expenses
(Note 3) 79,620 62,687 52,142
---------------------------------------------------------
230,392 179,455 149,900
---------------------------------------------------------
Operating income 28,851 22,037 17,157
Other income (expense):
Interest expense (37) (299) (85)
Interest income 676 342 245
Other, net 543 193 216
---------------------------------------------------------
1,182 236 376
---------------------------------------------------------
Income before income taxes 30,033 22,273 17,533
Provision for income taxes (Note 8) 11,062 8,182 6,461
---------------------------------------------------------
Net income $ 18,971 $ 14,091 $ 11,072
=========================================================
Net income per share $ 1.82 $ 1.58 $ 1.28
=========================================================
Weighted average common shares outstanding 10,432 8,910 8,655
=========================================================
</TABLE>
See accompanying notes.
9
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
------------------- Paid-In Retained
Shares Par Value Capital Earnings Total
-----------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 8,623 $ 86 $20,140 $37,579 $ 57,805
Issuance of common stock under employee benefit plans 40 1 1,069 - 1,070
Issuance of common stock under stock option plans 16 - 277 - 277
Net income - - - 11,072 11,072
----- ---- ------- ------- --------
Balance at December 31, 1994 8,679 87 21,486 48,651 70,224
Issuance of common stock through public offering 1,600 16 47,696 - 47,712
Issuance of common stock under employee benefit plans 46 1 1,191 - 1,192
Issuance of common stock under stock option plans 37 - 651 - 651
Net income - - - 14,091 14,091
----- ---- ------- ------- --------
Balance at December 31, 1995 10,362 104 71,024 62,742 133,870
Issuance of common stock under employee benefit plans 47 - 1,509 - 1,509
Issuance of common stock under stock option plans 60 1 1,431 - 1,432
Net income - - - 18,971 18,971
----- ---- ------- ------- --------
Balance at December 31, 1996 10,469 $105 $73,964 $81,713 $155,782
====== ==== ======= ======= ========
See accompanying notes.
</TABLE>
10
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
OPERATING ACTIVITIES
Net income $18,971 $14,091 $11,072
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 6,105 4,038 3,246
Provision for doubtful accounts 592 467 307
Gain on sale of property and equipment (281) (14) (84)
Deferred income taxes 1,483 937 (6)
Common stock contributed to employee benefit plans 1,028 867 762
Postretirement benefits 12 10 11
Changes in operating assets and liabilities:
Accounts receivable (2,428) (2,285) (1,395)
Inventory (24,930) (16,520) (7,639)
Refundable income taxes 564 (736) --
Other current assets 130 (2,078) 403
Other assets (709) (321) (275)
Accounts payable 4,275 2,678 (135)
Accrued expenses 830 449 831
Accrued payroll (765) 401 166
Income taxes payable -- (1,104) 1,104
-------------------------------------------------------------------
Net cash provided by operating activities 4,877 880 8,368
INVESTING ACTIVITIES
Purchases of property and equipment (34,459) (28,552) (13,708)
Proceeds from sale of property and equipment 801 119 105
Purchases of short-term investments (12,494) (32,410) (1,100)
Proceeds from sale of short-term investments 34,904 11,075 7,749
Payments received on notes receivable 51 47 10
Advances made on notes receivable (21) (195) (1,392)
-------------------------------------------------------------------
Net cash used in investing activities (11,218) (49,916) (8,336)
</TABLE>
11
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Financing activities
Borrowings on notes payable to banks $3,000 $ 9,100 $ --
Payments on notes payable to banks -- (9,100) --
Proceeds from issuance of long-term debt -- 15,776 --
Principal payments on long-term debt (198) (15,959) (455)
Net proceeds from issuance of common stock 1,913 48,688 585
------------------------------
Net cash provided by financing activities 4,715 48,505 130
------------------------------
Net increase (decrease) in cash (1,626) (531) 162
Cash at beginning of year 2,833 3,364 3,202
------------------------------
Cash at end of year $1,207 $ 2,833 $3,364
==============================
</TABLE>
See accompanying notes.
12
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
O'Reilly Automotive, Inc. (the Company) is a specialty retailer and supplier of
automotive after-market parts, tools, supplies and accessories to both the "Do-
It-Yourself" consumer and the professional installer throughout Kansas,
Missouri, Oklahoma and Arkansas.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
INVENTORY
Inventory, which consists of automotive hard parts, maintenance items,
accessories and tools, is stated at the lower of cost or market. Cost has been
determined using the last-in, first-out (LIFO) method. If the first-in, first-
out (FIFO) method of costing inventory had been used by the Company, inventory
would have been $91,011,000 and $68,666,000 as of December 31, 1996 and 1995,
respectively.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is provided on
straight-line and accelerated methods over the estimated useful lives of the
assets. Maintenance and repairs are charged to expense as incurred.
INCOME TAXES
The Company accounts for income taxes using the liability method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109. The liability
method provides that deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
13
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense charged
to operations amounted to $3,156,000, $2,797,000 and $2,119,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
PREOPENING COSTS
Costs associated with the opening of new stores, which consist primarily of
payroll and occupancy costs, are charged to operations as incurred.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares of
common stock outstanding during each period. Common stock equivalents
outstanding during the periods are immaterial.
Supplementary income per share amounts for 1995, calculated to give effect to
the reduction of interest expense and the increase in the weighted average
number of shares outstanding sufficient to retire certain short and long-term
indebtedness, as if the secondary public offering in 1995 had occurred at the
beginning of the year, would not be materially different than reported per share
amounts.
CONCENTRATION OF CREDIT RISK
The Company grants credit to certain customers who meet the Company's
preestablished credit requirements. Generally, the Company does not require
security when trade credit is granted to customers. Credit losses are provided
for in the Company's consolidated financial statements and consistently have
been within management's expectations.
Since 1994, the Company has provided long-term financing to a company, through a
note receivable, for the construction of an office building which is leased by
the Company (see Note 6). The note receivable, amounting to $1,495,000 and
$1,519,000 at December 31, 1996 and 1995, respectively, bears interest at 6% and
is due in January 2005.
Additionally, the Company maintains cash balances at various financial
institutions. Cash balances uninsured by the Federal Deposit Insurance
Corporation totaled $783,000 and $3,552,000 at December 31, 1996 and 1995,
respectively.
14
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The carrying value of the Company's financial instruments, including cash,
short-term investments, accounts receivable, accounts payable and long-term
debt, as reported in the accompanying consolidated balance sheets, approximates
fair value.
NOTE 2. SHORT-TERM INVESTMENTS
In 1994, the Company adopted the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The effect of adopting SFAS
No. 115 was immaterial.
The Company's short-term investments are classified as available-for-sale in
accordance with SFAS No. 115 and are carried at cost, which approximates fair
market value. At December 31, 1996, short-term investments consisted of
preferred equity securities totaling $1,000,000. At December 31, 1995, short-
term investments consisted of tax-exempt municipal bonds totaling $22,410,000
and preferred equity securities totaling $1,000,000.
NOTE 3. RELATED PARTIES
The Company leases certain land and buildings related to its O'Reilly Auto Parts
stores, under six-year operating lease agreements from O'Reilly Investment
Company and O'Reilly Real Estate Company, partnerships in which certain
stockholders of the Company are partners. Generally, these lease agreements
provide for renewal options for an additional six years at the option of the
Company (see Note 6). Rent expense under these operating leases totaled
$1,729,000 in 1996, $1,701,000 in 1995, and $1,682,000 in 1994.
NOTE 4. NOTES PAYABLE TO BANKS
The Company has available a short-term unsecured bank line of credit providing
for maximum borrowings of $17 million under which $2,500,000 was outstanding at
December 31, 1996. The line of credit, which bears interest at LIBOR plus 1.00%
(6.53% at December 31, 1996), expires in June 1997.
The Company has available another unsecured revolving credit facility with a
bank providing for maximum borrowings of $15 million, under which $500,000 was
outstanding at December 31, 1996. This credit facility bears interest at LIBOR
plus 1.25% (6.78% at December 31, 1996) and matures in May 1997. This agreement
requires the Company to maintain various minimum financial ratios.
Indirect borrowings under letters of credit and guarantees of indebtedness of
others totaled $636,000 and $1,526,000 at December 31, 1996 and 1995,
respectively.
15
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements (continued)
NOTE 5. LONG-TERM DEBT
At December 31, 1996 and 1995, long-term debt consisted of unsecured notes
payable to various individuals, amounting to $391,000 and $589,000,
respectively. The unsecured notes payable bear interest at rates ranging from 6%
to 9% and are due in monthly installments of $23,000 including interest. The
notes mature in varying amounts between 1997 and 2000, and $155,000 of such
notes are guaranteed by certain stockholders of the Company.
Principal maturities of long-term debt for each of the next four years are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $154
1998 96
1999 98
2000 43
</TABLE>
Cash paid by the Company for interest during the years ended December 31, 1996,
1995 and 1994 amounted to $35,000, $581,000 and $77,000, respectively.
NOTE 6. COMMITMENTS
The Company leases certain office space, property and equipment under long-term,
noncancelable operating leases. Future minimum rental payments, including
commitments of $1,751,000 per year through 1998 and $555,000 in total thereafter
in connection with the related-party leases described in Note 3, for each of the
next five years ending December 31 and in the aggregate are as follows (amounts
in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 3,276
1998 3,063
1999 1,316
2000 1,002
2001 785
Thereafter 3,375
------
$12,817
======
</TABLE>
Rental expense amounted to $3,348,000, $3,316,000 and $3,007,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Construction commitments totaled approximately $3.1 million at December 31,
1996.
16
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements (continued)
NOTE 7. EMPLOYEE BENEFIT PLANS
The Company sponsors a contributory profit-sharing and savings plan that covers
substantially all employees who are 21 years of age with at least six months of
service. Employees may contribute up to 15% of their annual compensation subject
to Internal Revenue Code maximum limitations. The Company has agreed to make
matching contributions equal to 50% of the first 2% of each employee's
contribution and 25% of the next 2% of each employee's contribution. Additional
contributions to the plan may be made as determined annually by the Board of
Directors. After three years of service, Company contributions and earnings
thereon vest at the rate of 20% per year of service with the Company. Company
contributions charged to operations amounted to $1,229,000 in 1996, $980,000 in
1995 and $887,000 in 1994. Company contributions, in the form of common stock,
to the profit-sharing and savings plan to match employee contributions during
the years ended December 31 were as follows:
<TABLE>
<CAPTION>
Market
Shares Value
-----------------------
<S> <C> <C>
1996 9,893 $344,000
1995 10,674 297,000
1994 10,198 273,000
</TABLE>
Profit-sharing contributions accrued at December 31, 1995, 1994, and 1993 were
funded in the next year through issuance of shares of the Company's common stock
as follows:
<TABLE>
<CAPTION>
Market
Year Funded Shares Value
----------------------------------------
<S> <C> <C>
1996 19,826 $684,000
1995 21,509 570,000
1994 16,939 489,000
</TABLE>
The Company also sponsors an unfunded noncontributory defined benefit health
care plan which provides certain health benefits to retired employees. According
to the terms of this plan, retirees' annual benefits will be limited to $1,000
per employee starting at age 66 for employees with 20 or more years of service.
Postretirement benefit costs for each of the years ended December 31, 1996, 1995
and 1994 were $12,000, $10,000 and $11,000, respectively.
17
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements (continued)
NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company has a stock option plan under which incentive stock options or
nonqualified stock options may be granted to officers and key employees. An
aggregate of 1,000,000 shares of common stock are reserved for future issuance
under this plan. The exercise price of options granted shall not be less than
the fair market value of the stock on the date of grant and will expire no later
than 10 years from the date of grant. Options granted pursuant to the plan
become exercisable no sooner than six months from the date of grant. In the case
of a stockholder owning more than 10% of the outstanding stock of the Company,
the exercise price of an incentive option may not be less than 110% of the fair
market value of the stock on the date of grant, and such options will expire no
later than five years from the date of grant. Also, the aggregate fair market
value of the stock with respect to which incentive stock options are exercisable
for the first time by any individual in any calendar year may not exceed
$100,000. A summary of outstanding stock options is as follows:
<TABLE>
<CAPTION>
Number
Price per Share of Shares
------------------------------
<S> <C> <C>
Outstanding at December 31, 1994 $17.50 -$33.75 302,775
Granted 23.75 - 32.50 120,250
Exercised 17.50 - 26.00 (36,775)
Canceled 17.50 - 32.25 (4,750)
------------------------------
Outstanding at December 31, 1995 $17.50 -$33.75 381,500
Granted 28.75 - 40.00 25,750
Exercised 17.50 - 31.00 (60,150)
Canceled 26.50 - 39.08 (17,750)
------------------------------
Outstanding at December 31, 1996 $17.50 -$40.00 329,350
==============================
</TABLE>
Options to purchase 318,850 shares were exercisable at December 31, 1996.
18
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements (continued)
NOTE 7. EMPLOYEE BENEFIT PLANS (CONTINUED)
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25 (APB No. 25). Under APB No. 25, no compensation expense is
recognized because the exercise price of the Company's stock options equals or
exceeds the market price of the stock on the date of grant. The effect of
applying the fair value method required by SFAS No. 123 to the Company's stock
option awards results in net income and net income per share that are not
materially different from amounts reported in the consolidated statements of
income.
The Company also maintains a stock option plan for nonemployee directors of the
Company under which 50,000 shares of common stock are reserved for future
issuance. All director stock options are granted at fair market value on the
date of grant and expire on the earlier of termination of service to the Company
as a director or seven years. Options granted under this plan become exercisable
six months from the date of grant. A summary of outstanding stock options is as
follows:
<TABLE>
<CAPTION>
Number
Price per Share of Shares
-----------------------------
<S> <C> <C>
Outstanding at December 31, 1994 $17.50 - $26.25 10,000
Granted 27.00 5,000
-----------------------------
Outstanding at December 31, 1995 $17.50 - $27.00 15,000
Granted 36.38 5,000
-----------------------------
Outstanding at December 31, 1996 $17.50 - $36.38 20,000
=============================
</TABLE>
All options under this plan were exercisable at December 31, 1996.
Additionally, the Company has adopted a stock purchase plan covering an
aggregate of 250,000 shares of common stock under which approximately 200,000
shares of common stock are reserved for future issuance. Under the plan,
substantially all employees and nonemployee directors have the right to purchase
shares of the Company's common stock monthly at a price equal to 85% of the fair
market value of the stock. Under the plan, 16,468 shares were issued at an
average price of $29.21 per share during 1996, 13,784 shares were issued at an
average price of $23.54 per share during 1995 and 13,499 shares were issued at
an average price of $22.81 per share during 1994.
The Company adopted a performance incentive plan for the Company's senior
management under which 100,000 shares of restricted stock are reserved for
future issuance. During 1996, 278 shares were issued under this plan. No shares
were issued under this plan in 1995.
19
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements (continued)
NOTE 8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows at December 31
(amounts in thousands):
1996 1995
---------------------
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 168 $ 147
Vacation accrual 481 439
Other accruals 152 114
---------------------
801 700
Noncurrent:
Postretirement benefit obligation 153 150
---------------------
Total deferred tax assets 954 850
---------------------
Deferred tax liabilities:
Current:
Inventory carrying value 1,112 170
---------------------
1,112 170
Noncurrent:
Depreciation 1,605 960
---------------------
Total deferred tax liabilities 2,717 1,130
---------------------
Net deferred tax liabilities $(1,763) $ (280)
=====================
20
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements (continued)
NOTE 8. INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
-----------------------------
<S> <C> <C> <C>
1996:
Federal $8,502 $1,316 $ 9,818
State 1,077 167 1,244
-----------------------------
$9,579 $1,483 $11,062
=============================
1995:
Federal $6,473 $ 837 $ 7,310
State 772 100 872
-----------------------------
$7,245 $ 937 $ 8,182
=============================
1994:
Federal $5,840 $ (5) $ 5,835
State 627 (1) 626
-----------------------------
$6,467 $ (6) $ 6,461
=============================
</TABLE>
A reconciliation of the provision for income taxes to the amounts computed at
the federal statutory rate is as follows (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $10,512 $7,796 $6,137
State income taxes, net of federal tax benefit 809 567 407
Other items, net (259) (181) (83)
------------------------------
$11,062 $8,182 $6,461
==============================
</TABLE>
During the years ended December 31, 1996, 1995 and 1994, cash paid by the
Company for income taxes amounted to $9,015,000, $9,085,000, and $5,395,000,
respectively.
21
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements (continued)
NOTE 9. PUBLIC OFFERING OF COMMON STOCK
On November 20, 1995, the Company completed a public offering of 2,600,000
shares of common stock. Pursuant to this offering, the Company issued 1,600,000
shares of common stock resulting in net proceeds to the Company of $47,712,000.
A portion of the proceeds was used to repay the Company's outstanding
indebtedness under its bank credit facilities. The remaining portion of the
proceeds was used to fund the Company's expansion and for the purchase of
short-term investments.
NOTE 10. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Product sales $55,321 $68,782 $70,432 $64,708
Gross profit 22,409 28,212 29,247 28,603
Operating income 6,154 7,678 8,294 6,725
Net income 4,088 4,947 5,422 4,514
Net income per share: .39 .47 .52 .43
Year ended December 31, 1995
Product sales $42,766 $50,644 $57,181 $50,901
Gross profit 17,556 20,549 23,686 22,933
Operating income 4,562 5,444 6,677 5,354
Net income 2,913 3,447 4,139 3,592
Net income per share: .34 .39 .47 .38
</TABLE>
The above quarterly financial data is unaudited, but in the opinion of
management, all adjustments necessary for a fair presentation of the selected
data for these interim periods presented have been included.
22
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
Report of Independent Auditors
The Board of Directors and Stockholders
O'Reilly Automotive, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of O'Reilly
Automotive, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of O'Reilly
Automotive, Inc. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Kansas City, Missouri
February 14, 1997
23
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1996 Annual Report to Shareholders (continued)
NUMBER OF STOCKHOLDERS
As of December 31, 1996, O'Reilly Automotive, Inc. has approximately 5,500
stockholders based on the number of holders of record and an estimate of the
number of individual participants represented by security position listings.
MARKET PRICES AND DIVIDEND INFORMATION
The prices in the table below represent the high and low sales prices for
O'Reilly Automotive, Inc. common stock as reported by the Nasdaq Stock Market.
The common stock began trading on April 22, 1993. No cash dividends have been
declared since 1992, and the Company does not anticipate paying any cash
dividends in the foreseeable future.
<TABLE>
<CAPTION>
1996 1995
High Low High Low
----------------------------------------
<S> <C> <C> <C> <C>
First Quarter 35.500 28.750 28.125 23.000
Second Quarter 40.750 35.000 28.500 24.750
Third Quarter 38.250 34.250 31.000 28.000
Fourth Quarter 37.000 31.000 33.625 27.500
For The Year 40.750 28.750 33.625 23.000
</TABLE>
24
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 21.1 - Subsidiaries of the Company
Subsidiary State of Incorporation
- ---------- -----------------------
Ozark Automotive Distributors, Inc. Missouri
Greene County Realty Co. Missouri
O'Reilly II Aviation, Inc. Missouri
One hundred percent of the capital stock of each of the above listed
subsidiaries is directly owned by O'Reilly Automotive, Inc.
1
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 23.1 - Consent of Ernst & Young LLP, independent auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of O'Reilly Automotive, Inc. and Subsidiaries of our report dated February 14,
1997, included in the 1996 Annual Report to Stockholders of O'Reilly
Automotive, Inc.
Our Audits also included the financial statement schedule of O'Reilly
Automotive, Inc. and Subsidiaries listed in item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-61632) pertaining to the O'Reilly Automotive, Inc. 1993 Stock
Option Plan, Director Stock Option Plan, and Stock Purchase Plan and in the
Registration Statement (Form S-8 No. 33-73892) pertaining to the O'Reilly
Automotive, Inc. Profit Sharing and Savings Plan of our report dated February
14, 1997, with respect to the consolidated financial statements incorporated
herein by reference, and our report included in the preceding paragraph with
respect to the financial statement schedule included in this Annual Report (Form
10-K) of O'Reilly Automotive, Inc.
/s/ Ernst & Young LLP
------------------------------
Ernst & Young LLP
Kansas City, Missouri
March 27, 1997
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet at December 31, 1996 and the Consolidated
Statement of Income for the Twelve Months Ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,207
<SECURITIES> 1,000
<RECEIVABLES> 11,740
<ALLOWANCES> 444
<INVENTORY> 83,909
<CURRENT-ASSETS> 2,740
<PP&E> 101,220
<DEPRECIATION> 21,435
<TOTAL-ASSETS> 183,623
<CURRENT-LIABILITIES> 25,749
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 155,677
<TOTAL-LIABILITY-AND-EQUITY> 183,623
<SALES> 259,243
<TOTAL-REVENUES> 260,462
<CGS> 150,772
<TOTAL-COSTS> 79,620
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 672
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 30,033
<INCOME-TAX> 11,062
<INCOME-CONTINUING> 18,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,971
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.82
</TABLE>
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 99.1 - Certain Risk Factors
The following factors could affect the Company's actual results, including its
revenues, expenses and net income, and could cause them to differ from any
forward-looking statements made by or on behalf of the Company.
Competition
The Company competes with a large number of retail and wholesale automotive
aftermarket product suppliers. The distribution of automotive aftermarket
products is a highly competitive industry, particularly in the more densely
populated market areas served by the Company. Competitors include national and
regional automotive parts chains, independently owned parts stores (some of
which are associated with national auto parts distributors or associations),
automobile dealerships, mass or general merchandise, discount and convenience
chains that carry automotive products, independent warehouse distributors and
parts stores and national warehouse distributors and associations. Some of the
Company's competitors are larger than the Company and have greater financial
resources than the Company.
No Assurance of Future Growth
Management believes that the Company's ability to open additional stores at an
accelerated rate will be a significant factor in achieving its growth objectives
for the future. The ability of the Company to accomplish its growth is
dependent, in part, on matters beyond the Company's control, such as weather
conditions, zoning and other issues related to new store site development, the
availability of qualified management personnel and general business and economic
conditions. No assurance can be given that the Company's current growth rate
can be maintained.
Dependence Upon Key and Other Personnel
The success of the Company has been largely dependent on the efforts of certain
key personnel of the Company, including David E. O'Reilly, Lawrence P.
O'Reilly, Charles H. O'Reilly, Jr., Rosalie O'Reilly Wooten and Ted F. Wise.
The loss of the services of one or more of these individuals could have a
material adverse effect on the Company's business and results of operations.
Additionally, in order to successfully implement and manage its growth strategy,
the Company will be dependent upon its ability to continue to attract and retain
qualified personnel. There can be no assurance that the Company will be able to
continue to attract such personnel
Concentration of Ownership by Management
The Company's executive officers and directors as a group beneficially own a
substantial percentage of the outstanding shares of the Company's common stock.
These officers and directors have the ability to exercise effective voting
control of the Company, including the election of all of the Company's
directors, and to effectively determine the vote on any matter being voted on by
the Company shareholders, including any merger, sale of assets or other change
in control of the Company.
1
