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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, 1997
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 (IRS 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 ______
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 27, 1998, an aggregate of 21,149,429 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
$418,915,154 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, 1997 Parts I, II and IV
Proxy Statement for 1998 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
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 259 stores (at December 31,
1997) within the states of Missouri, Arkansas, Kansas, Oklahoma, Nebraska and
Iowa. 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 auto body 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 1997 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 1997, the Company derived approximately one-half of its
O'Reilly 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 Automotive Products within its market areas.
The increased demand generated by this expanded customer base permits the
Company to (i) stock
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(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 1997, the Company's three distribution centers experienced an annual
inventory turn of approximately 5.3 times, and the O'Reilly store network had an
average inventory turn of approximately 3.7 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 SKU's at each O'Reilly store site.
The Company further believes that its ability to provide its customers with
access to over 105,000 SKU's (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
SKU's stocked in each store, (iii) same day or overnight availability of over
105,000 SKU's 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 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.
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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. At
December 31, 1997, the Company operated 259 stores within the states of
Missouri, Arkansas, Kansas, Oklahoma, Nebraska and Iowa. For the five years
ended December 31, 1997, the Company has increased the number of stores at an
average annual rate of approximately 15%. Aside from the substantial growth
resulting from the Hi-Lo Automotive, Inc. merger (see below) in January 1998,
the Company has adopted certain strategic initiatives designed to accelerate its
new store opening rate to approximately 16% by 1998. The Company intends to open
50 new stores in 1998 and 80 new stores in 1999, including stores to be opened
in the new market areas of Texas, 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.
On January 30, 1998, the Company completed a merger with Hi-Lo Automotive,
Inc. and its subsidiaries ("Hi/LO") by acquiring 100% of the outstanding capital
stock. Hi/LO is a specialty retailer and supplier of Automotive Products
headquartered in Houston, Texas. Hi/LO is now a wholly-owned subsidiary of the
Company, with 189 stores located in Texas (165), Louisiana (17) and California
(7), and a 375,000 square foot distribution center located in Houston. Excluding
California and its seven stores, the Hi/LO operations are contiguous to
O'Reilly's existing operations, thereby creating a natural geographic extension
for the Company into market areas already slated for future growth and
development. The equity purchase price was approximately $47.8 million, or $4.35
per common share. Additionally, approximately $43.2 million of debt was assumed
for a total purchase price of $91 million.
In order to support O'Reilly's acquisition of Hi/LO, and continued working
capital and general corporate needs, the Company replaced its lines of credit in
January 1998 with new, unsecured, syndicated credit facilities totaling $175
million. The facilities are comprised of a $125 million five-year revolving
credit facility which includes a $5 million sublimit for the issuance of letters
of credit and a $50 million five-year term loan facility. These new credit
facilities are guaranteed by the subsidiaries of the Company and the acquired
Hi/LO subsidiaries. The Company is required to meet various financial covenants
as detailed in the credit agreement.
During 1998, the Company will convert the Hi/LO stores and distribution
center to the corresponding O'Reilly systems, strategies and policies. Other
than the description of the merger transaction as outlined above and as
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations (see Exhibit 13.1) of the Company, the results of
operations of Hi/LO and other related information are not included in this
report.
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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 40
(net) stores opened in 1997, 10 are located in Nebraska, 10 in Oklahoma, 8 in
Kansas, 7 in Iowa and the remainder are located in Missouri and Arkansas. 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.
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 typically 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
$900,000-$1,100,000; 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 $350,000. 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 1997, the
Company renovated or relocated 28 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, for receiving,
storing and distributing Automotive Products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations. In January 1998, a
375,000 square foot warehouse distribution center was added in Houston, Texas as
a result of the Hi/LO merger. By the end of 1998, the Company expects the
construction of the 160,000 square foot warehouse distribution center in Des
Moines, Iowa to be completed. 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
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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.
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, 1997, are categorized based on the
number of in-stock SKU's as follows:
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<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 28 3,000 - 5,000 12,000 - 16,000
Level 1 Stores (prototype) 198 4,000 - 8,000 16,001 - 25,000
Master Inventory Stores 33 6,000 - 12,000 25,001 - 44,000
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259
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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 SKU's, 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 SKU's 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 SKU's 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 auto body 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 9 regional locations,
7 of which are located at an O'Reilly store. There are two free-standing machine
shops, one located in Springfield, Missouri, and the other in Tulsa, Oklahoma.
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.
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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 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 vice-president of
marketing and training 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. As of December 31,
1997, approximately 500 parts specialists were ASE certified.
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 31 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
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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.
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 40 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 60 independently
owned parts stores currently purchasing Automotive Products from Ozark, 55
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 43 members as of December 31, 1997, 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 Low Price Guarantee(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 and 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 and radio
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 1.2% in 1996 to approximately
1.1% of product sales in 1997.
Page 8
<PAGE>
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 addition to name brand products, O'Reilly stores carry a wide
variety of high-quality private label products under its O'Reilly Auto Parts(R),
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 400 vendors,
the three largest of which accounted for approximately 13% of the Company's
total purchases in fiscal 1997 and none of which accounted for more than 5% of
such purchases. The Company has no long-term contractual purchase 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, Parts
America (formerly known as 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 1997.
The Company competes on the basis of customer service, merchandise selection and
availability, price, and store location. The Company believes that its principal
Page 9
<PAGE>
strengths are its ability to provide both the DIY and Professional Installers
same day or overnight availability to more than 105,000 SKU's 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.
Employees
As of December 31, 1997, the Company had 3,945 team members, of whom 2,973
were employed at the O'Reilly stores, 595 were employed at the distribution
centers and 377 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.
Page 10
<PAGE>
ITEM 2 PROPERTIES
- ------------------------
The following table provides certain information with respect to the
Company's headquarters and distribution centers as of December 31, 1997:
<TABLE>
<CAPTION>
Square
Location Principal Use(s) Footage Interest
- --------------- ------------------------------- ---------- --------
<S> <C> <C> <C>
Springfield, MO Executive and Administrative
Offices and Distribution Center 256,000(a)(b) Owned
Springfield, MO Administrative Offices, Training
and Research 35,000 Leased(c)
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 $2.5 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 259 stores operated by the Company at December 31, 1997, 131 stores
were owned, 69 stores were leased from unaffiliated parties and 59 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 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 15 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, 1997.
Page 11
<PAGE>
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 47, Executive Vice-President, has served in this capacity since
March 1993. Mr. Wise had served as Vice President-Operations of the Company from
June, 1984 until being elected to his current position.
James R. Batten, CPA, age 35, Vice-President of Finance/Chief Financial Officer,
has served in this capacity since October 1997. From March 1994 until promotion
to his current position, Mr. Batten served as Chief Financial Officer of the
Company and previously held the position of Finance Manager of the Company from
January 1993 until March 1994. 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.
Christopher T. Stange, CPA, age 30, is the Director of Accounting since October
1997, in addition to holding the position of Corporate Controller since
September 1996. He previously held the position of Accounting Supervisor. Mr.
Stange joined the Company in 1994 as the Investor Relations Coordinator and was
previously employed by Deloitte & Touche, LLP in St. Louis Missouri.
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 28, 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 pages 12 through 16, is incorporated herein by this
reference.
ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------
None.
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 17 through 27, are incorporated herein by this
reference.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
------------------------
None.
Page 12
<PAGE>
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 1998 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.
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, 1997, are incorporated herein by
this reference in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1996 and 1995
Report of Independent Auditors
Page 13
<PAGE>
(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. Management Contracts and Compensatory Plans or Arrangements
Each of the Company's management contracts and compensatory plans or
arrangements are identified in the Exhibit Index on Page E-1.
(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, 1997.
(c) Exhibits
See Exhibit Index on page E-1.
(d) Financial Statement Schedules
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 Additions - Charged to Other Deductions - Balance at End
Beginning of Period Charged to Costs Accounts - Describe of Period
and Expenses Describe
- ---------------------------------- -------------------- ------------------- ------------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Deducted from asset account:
Allowance for doubtful $444 $662 $0 $743 (1) $363
accounts
Year Ended December 31, 1996:
Deducted from asset account:
Allowance for doubtful $386 $592 $0 $534 (1) $444
accounts
Year Ended December 31, 1995:
Deducted from asset account:
Allowance for doubtful $293 $467 $0 $374 (1) $386
accounts
</TABLE>
(1) Uncollectible accounts written off.
Page 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 31, 1998 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 March 31, 1998
- --------------------------- Chief Executive Officer
David E. O'Reilly (principal executive officer)
/s/James R. Batten Vice-President of Finance/ March 31, 1998
- --------------------------- Chief Financial Officer
James R. Batten (principle financial officer)
/s/Lawrence P. O'Reilly Director, President and March 31, 1998
- --------------------------- Chief Operating Officer
Lawrence P. O'Reilly
/s/Charles H. O'Reilly, Jr. Director and Chairman March 31, 1998
- --------------------------- of the Board
Charles H. O'Reilly, Jr.
/s/Rosalie O'Reilly Wooten Director and Executive March 31, 1998
- --------------------------- Vice-President
Rosalie O'Reilly Wooten
/s/Charles H. O'Reilly, Sr. Director and Chairman Emeritus March 31, 1998
- ---------------------------
Charles H. O'Reilly, Sr.
/s/Jay D. Burchfield Director March 31, 1998
- ---------------------------
Jay D. Burchfield
/s/Joe C. Greene Director March 31, 1998
- ---------------------------
Joe C. Greene
/s/Chris T. Stange Director of Accounting/ March 31, 1998
- ---------------------------- Controller
Chris T. Stange (principal accounting officer)
</TABLE>
Page 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.
2.2 Agreement and Plan of Merger, dated as of December 23, 1997, by and
among O'Reilly Automotive, Inc., Shamrock Acquisition, Inc. and Hi-Lo
Automotive, Inc., filed as Exhibit (c)(1) to the Registrants' Tender
Offer Statement on Schedule 14D-1 dated December 23, 1997.
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.
10.4 Form of Retirement Agreement between the Registrant and
David E. O'Reilly, Lawrence P. O'Reilly, Charles H.
O'Reilly, Jr. and Rosalie O'Reilly Wooten, filed herewith.
10.7(a) O'Reilly Automotive, Inc. Profit Sharing and Savings Plan, filed as
Exhibit 4.1 to the Registrant's Registration Statement 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.
</TABLE>
Page E - 1
<PAGE>
EXHIBIT INDEX (continued)
<TABLE>
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
<S> <C>
10.13 Loan commitment and construction loan agreement between the Registrant
and Deck Enterprises, filed as Exhibit 10.13 to the Registrant's Annual
Shareholders' Report on Form 10-K for the year ended December 31, 1993
10.14 Lease between the Registrant and Deck Enterprises, filed as
Exhibit 10.14 to the Registrant's Annual Shareholders' Report on
Form 10-K for the year ended December 31, 1993
10.15 Amended Employment Agreement between the Registrant and Charles H.
O'Reilly, Jr., filed as Exhibit 10.17 to the Registrant's Annual
Shareholders' Report on Form 10-K for the year ended
December 31, 1996
10.16 Second Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, filed as Exhibit 10.20 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
10.17 Credit Agreement between the Registrant and NationsBank, N.A.,
dated October 16, 1997, filed as Exhibit 10.17 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.18 O'Reilly Automotive, Inc. Performance Incentive Plan, filed as
Exhibit 10.18 (a) to the Registrant's Annual Shareholders' Report on
Form 10-K for the year ended December 31, 1996
10.19 Loan Agreement between the Registrant and Commerce Bank, N.A., dated
October 1, 1997, filed as Exhibit 10.19 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997.
13.1 1997 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 Registrant, 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 Registrant 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.
Page E - 2
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 10.4 - Form of Retirement Agreement between the Registrant and
David E. O'Reilly, Lawrence P. O'Reilly,
Charles H. O'Reilly, Jr. and Rosalie O'Reilly Wooten
Retirement Agreement
This AGREEMENT made on this date, (Date), between O'Reilly Automotive, Inc.
(the "Employer"), and (Employee), (the "Employee"), to take affect when the
employee retires from regular employment.
Recitals
The services of the Employee, his experience and knowledge of the affairs
of the Company, and his reputation and contacts both inside the Company as well
as outside the Company are extremely valuable to the Employer, and
The Employer desires the Employee to remain in its service and wishes
to receive the benefit of his knowledge, experience, reputation, and contacts
for a period of ten years after his retirement, and is willing to offer the
Employee an incentive to do so in the form of retirement compensation and death
and disability benefits,
It is therefore agreed:
1. Obligations of Employer.
A. Consultation. After the Employee retires from Employer, he shall be
employed as a consultant for a period of ten years, at a yearly salary of
$100,000, payable in equal monthly installments. No payment shall be made,
however, unless the Employee performs all the required terms and conditions of
this Agreement.
B. Additional compensation for the executive or surviving spouse will
include:
(1) Full participation for the executive and spouse in the company
health insurance program.
(2) Participation in the medical reimbursement plan for Senior
Management which pays all medical/dental expenses not covered by the
Health Insurance Plan up to $3,500 per year.
(3) Use and maintenance, including fuel, of a late model car,
replaceable every three years.
(4) Employee will continue to serve on the Board of Directors of
Employer unless otherwise voted by the shareholders of Employer.
(5) Use of Company plane will be available, as Company schedule
permits, at the preferred Company rate per hour, such rate to be
determined from time to time, by the CEO and COO of the Company.
(6) Premiums paid by Employer for split-dollar life insurance will
continue for the duration of this agreement or until Employee ends any
subsequent consulting agreements with Employer.
C. Death or disability. If the Employee dies or becomes totally
disabled during this ten year period, his yearly salary of $100,000 shall
continue for the balance of the ten year period as compensation for service up
until that time. Such payments shall be made to the Employee if living, or if
not, to persons that the Employee has designated in writing before his death, or
if no such designation was made to the Employee's surviving spouse, or if none
then equally to his heirs-at-law.
2. Duties of Employee:
A. Consultation services. During the period of ten years after his
retirement, the Employee shall perform all advisory and consultative services
that the Employer may reasonably request, in order that the Employer may
continue to benefit from the Employee's experience, knowledge, reputation and
contacts in the industry. The Employee shall be available to advise and counsel
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 10.4 - Form of Retirement Agreement between the Registrant and
David E. O'Reilly, Lawrence P. O'Reilly,
Charles H. O'Reilly, Jr. and Rosalie O'Reilly Wooten (continued)
the Employer's officers and directors at all reasonable times by telephone,
mail, or in person. However, the Employee's failure to render such services or
to give such advice and counsel due to illness shall not affect his right to
receive compensation during that period.
B. Competition restriction. During the period of ten years after his
retirement, the Employee shall not become associated with, engage in, or render
service to any other business in competition with the Employer.
3. Failure to perform. If the Employee shall fail to substantially perform all
the terms and conditions of this Agreement, he shall forfeit his rights to all
subsequent compensation that the Employer is required to pay to him or others.
4. No assignment. The Employee may not assign his interest in this Agreement
without the Employer's written consent.
5. Binding effect. This Agreement shall be binding upon and shall inure to the
benefit of the successors and assigns of the Employer. The Company also agrees
to cause any person, firm, or corporation which acquires the Company or its
operating assets to assume the obligations of the Company under this Agreement.
6. Notice. Any notice to be delivered under this Agreement shall be given in
writing and delivered, personally or by certified mail, postage prepaid,
addressed to the Company or Employee at their last known addresses.
7. Non-waiver. No delay or failure by either party to exercise any right under
this Agreement, and no partial or single exercise of that right, shall
constitute a waiver of that or any other right.
8. Headings. Headings in the Agreement are for convenience only and shall not be
used to interpret or construe its provisions.
9. Governing law. This Agreement shall be construed in accordance with and
governed by the laws of the State of Missouri.
10. Counterparts. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
In witness whereof the Employee has signed this Agreement, and the
President of the Employer has signed, in the name of the Employer, pursuant to a
resolution adopted by its Board of Directors.
O'Reilly Automotive, Inc.
By /s/ David O'Reilly
-------------------------
/s/ (Employee)
- -------------------------
Employee
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Year Ended December 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Product sales $316,399 $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 181,789 150,772 116,768 97,758 82,102 65,066 56,255 50,027 44,930 36,246
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------
Gross profit 134,610 108,471 84,724 69,299 55,062 45,081 38,682 32,345 27,005 23,482
Operating, selling, general
and administrative expenses 97,526 79,620 62,687 52,142 42,492 35,204 29,961 26,750 23,231 19,281
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------
Operating income 37,084 28,851 22,037 17,157 12,570 9,877 8,721 5,595 3,774 4,201
Other income (expense), net 472 1,182 236 376 216 204 (104) (566) (367) (245)
Provision for income taxes 14,413 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 23,143 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 23,143 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 $ 23,143 $ 18,971 $ 14,091 $ 11,072 $ 8,278 $ 6,361 $ 5,382 $ 3,006 $ 2,089 $ 2,541
================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ========
Basic Earnings Per Common Share:
Income per share from continuing
operations before cumulative
effects of changes in
accounting principles $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15 $ 0.35
================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ========
Income per share from
continuing operations $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15 $ 0.35
Income (loss) per share from
discontinued operations - - - - - 0.01 - (0.01) - -
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------
Net income per share $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.21 $ 0.15 $ 0.35
================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ========
Cash dividends per share $ - $ - $ - $ - $ - $ 0.0009 $ 0.0008 $ 0.0008 $ 0.0008 $ 0.0007
Weighted average common
shares outstanding 21,043 20,864 17,820 17,310 16,470 14,718 14,654 14,622 14,612 7,238
================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ========
Earnings Per Common Share -
Assuming Dilution:
Income per share from
continuing operations
before cumulative
effects of changes in
accounting principles $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15 $ 0.35
================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ========
Income per share from
continuing operations $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.42 $ 0.37 $ 0.22 $ 0.15 $ 0.35
Income (loss) per share from
discontinued operations - - - - - 0.01 - (0.01) - -
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------
Net income per share $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.21 $ 0.15 $ 0.35
================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ========
Weighted average common
shares outstanding
- adjusted (d) 21,277 21,032 17,902 17,389 16,523 14,718 14,654 14,622 14,612 7,238
================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ========
</TABLE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Selected Consolidated Financial Data (continued)
<TABLE>
<CAPTION>
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------
Year ended December 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------
(In thousands, Except Selected Operating Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores at year end (a) 259 219 188 165 145 127 116 112 106 98
Total store square footage at
year end (in 000's) (b) 1,454 1,155 923 785 671 571 511 480 427 386
Weighted average product
sales per store
(in 000's) (b) $1,306.0 $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) $235.8 $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) 6.8% 14.4% 8.9% 8.9% 14.9% 11.4% 9.2% 11.2% 8.5% *
BALANCE SHEET DATA:
Working capital $93,763 $74,403 $80,471 $41,416 $41,193 $15,251 $13,434 $11,634 $9,853 $9,378
Total assets 247,617 183,623 153,604 87,327 73,112 58,871 49,549 46,148 45,200 31,620
Short-term debt 130 3,154 231 311 495 3,462 1,298 2,281 3,897 3,341
Long-term debt, less
current portion 22,641 237 358 461 732 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 182,039 155,782 133,870 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 combinations
in each such year of two stores located within one mile of each other.
Additionally, two stores were closed during 1997. 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.
(d) No additional dilution resulting from stock options existed until 1993.
Stock was not dilutive until 1993 when options were first granted.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 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 1997 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 O'Reilly Automotive, Inc.'s ("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, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product sales 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse
and distribution expenses 57.5% 58.2% 58.0%
- -----------------------------------------------------------------------------------------------------------------
Gross profit 42.5% 41.8% 42.0%
Operating, selling, general and
administrative expenses 30.8% 30.7% 31.1%
- -----------------------------------------------------------------------------------------------------------------
Operating income 11.7% 11.1% 10.9%
Other income, net 0.1% 0.5% 0.1%
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes 11.8% 11.6% 11.0%
Provision for income taxes 4.5% 4.3% 4.0%
- -----------------------------------------------------------------------------------------------------------------
Net income 7.3% 7.3% 7.0%
=================================================================================================================
</TABLE>
1997 COMPARED TO 1996
Product sales increased $57.2 million, or 22.1%, from $259.2 million in 1996 to
$316.4 million in 1997 due to the opening of 40 (net) O'Reilly stores during
1997 and a $15.6 million, or 6.8% 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 1997 at comparable levels to those set in 1996, an increase in
the broad selection of stock keeping units ("SKU's") available at the newer or
recently renovated or relocated 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 24.1% from $108.5 million (or 41.8% of product sales) in
1996 to $134.6 million (or 42.5% of product sales) in 1997. 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. The increase was partially offset by continued price competition among
automotive parts retailers. Management believes that price competition among
national and regional automotive parts retailers will continue to influence
gross profit margins in 1998 and beyond.
Operating, selling, general and administrative expenses ("OSG&A expenses")
increased $17.9 million from $79.6 million (or 30.7% of product sales) in 1996
to $97.5 million (or 30.8% of product sales) in 1997. 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 1997 in
order to support the increased level of the Company's operations.
The Company's provision for income taxes increased from 36.8% of income before
income taxes in 1996 to 38.4% in 1997. 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. Additionally, in 1996, interest income of over $400,000
was tax exempt, but all interest income was taxable in 1997.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Principally as a result of the foregoing, net income in 1997 was $23.1 million,
or 7.3% of product sales, an increase of $4.1 million (or 21.6%) from net income
in 1996 of $19.0 million, or 7.3% of product sales.
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 the 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. The 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.
Operating, selling, general and administrative expenses increased $16.9 million
from $62.7 million (or 31.1% 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.9 million in 1995, $4.9 million
in 1996 and $17.9 million in 1997. 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. The increase in 1997 compared to 1996 is principally the result of
increases in net income and accounts payable and accrued expenses, partially
offset by an increase in inventory. The increase in inventory is due to the
addition of 40 net new stores and an increase in inventory levels at most
O'Reilly stores and the distribution centers.
Net cash used in investing activities was $49.9 million in 1995, $11.2 million
in 1996, and $37.7 million in 1997. The decrease in cash used in 1996 compared
to 1995 was primarily due to an increase in the net proceeds from the sale and
purchase of short-term investments, offset by increased capital expenditures.
The increase in cash used in 1997 was primarily due to increased capital
expenditures without any offsetting proceeds from the sale of short-term
investments.
Capital expenditures were $28.6 million in 1995, $34.5 million in 1996, and
$37.2 million in 1997. These expenditures were primarily related to the opening
of new O'Reilly stores as well as relocation or remodeling of existing O'Reilly
stores. The Company opened 23 new stores and remodeled or relocated 21 stores in
1995. In 1996, the Company opened 31 new stores and remodeled or relocated 32
stores. During 1997, the Company opened 40 (net) new stores and remodeled or
relocated 28 stores. Also, in 1995, 1996 and 1997, the Company purchased real
estate for new stores and store relocations totaling approximately $6.0 million,
$7.8 million and $8.1 million, respectively. The Company purchased real estate
for the Oklahoma City distribution center totaling $0.8 million in 1995.
Construction costs for the Oklahoma City distribution center, which was
completed in March 1996, totaled approximately $3.1 million. In 1997, the
Company purchased real estate for the Des Moines distribution center totaling
$0.7 million.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Construction costs-to-date for the Des Moines distribution center, which is
scheduled to be completed in late 1998, totaled $0.2 million at December 31,
1997.
The Company's continuing 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 long-term bank borrowings.
On July 8, 1997, the Company's Board of Directors declared a two-for-one stock
split effected in the form of a 100% stock dividend to all shareholders of
record as of July 31, 1997. The stock dividend was paid on August 31, 1997.
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.
At December 31, 1997, the Company had available an unsecured line of credit with
NationsBank, under which the Company could borrow up to $32.5 million until
October 2000. Borrowings outstanding under the line of credit bore interest at
LIBOR plus 0.5% (6.22% as of December 31, 1997). At December 31, 1997, $15.7
million was outstanding under the line of credit. This debt was replaced with
the long-term credit facility described below.
The Company also had an unsecured revolving credit facility available with
Commerce Bank, N.A., of Springfield, Missouri, under which the Company could
borrow up to $32.5 million upon compliance with various minimum financial
ratios. This credit facility bore interest at LIBOR plus 0.5% (6.22% at December
31, 1997) and was scheduled to mature in September 2000. At December 31, 1997,
$6.8 million was outstanding under this credit facility. This debt was also
replaced with the long-term credit facility described below.
In January 1998, the Company acquired 100% ownership of Hi-Lo Automotive, Inc.
("Hi/LO"), and its subsidiaries. This acquisition added 189 stores located in
Texas, Louisiana and California, as well as a distribution center located in
Houston, Texas, to the Company. Consideration given in this acquisition included
$47.8 million, or $4.35 per common share, for all issued and outstanding common
shares.
Financing obtained subsequent to December 31, 1997, replaced existing credit
facilities and provided financing for the Hi/LO acquisition. The new syndicated
credit agreement, in the amount of $175 million, includes a five-year revolving
credit facility of $125 million, of which $10 million is a swing line facility
to fund short-term financing requirements, and a five-year term loan of $50
million. This credit agreement is guaranteed by the subsidiaries of the Company
and the acquired Hi/LO subsidiaries. Management believes that funding sources
for repayment of the long-term obligations will be sufficiently provided by the
newly acquired and existing operations of the Company.
Management believes that the Company's existing cash and short-term investments,
cash expected to be provided by operating activities, current 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.
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.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
YEAR 2000
Management has developed a plan to modify the Company's information technology
to recognize the year 2000 and has begun converting critical data processing
systems. The Company's Year 2000 initiative is being managed by a team of
internal staff and management. Management currently expects the project to be
substantially complete by early 1999 and that the cost of the Year 2000
initiative, principally including internal costs, will not be material to the
Company's results of operations or financial position. Furthermore, this project
is not expected to have a significant effect on operations. The Company will
continue to implement systems with strategic value though some projects may be
delayed due to resource constraints.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), 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" ("APB 25"). 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 has elected to follow APB 25
and related Interpretations in accounting for its employee stock options because
the alternative fair value accounting provided for under SFAS No. 123 requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which
requires the presentation of earnings per share by all companies that have
issued common stock or potential common stock if those securities trade in a
public market either on a stock exchange or in the over-the-counter market. This
statement supersedes Accounting Principles Board Opinion No. 15, "Earnings per
Share." The earnings per share amounts prior to 1997 have been restated as
required to comply with SFAS No. 128.
Other recent pronouncements of the FASB, which are not required to be adopted
until 1998, include SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
The statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company has not yet determined the effects, if any,
the adoption will have on the Company's financial statements. Applicability of
SFAS No. 130 will not impact amounts previously reported for net income.
SFAS No. 131 supersedes SFAS No. 14 and establishes new standards for the way
that public companies report selected information about operating segments in
annual financial statements and requires that those companies report selected
information about segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company has not yet
determined the effects, if any, the adoption will have on the Company's
financial statements.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
<S> <C> <C>
Assets
Current assets:
Cash $ 2,285 $ 1,207
Short-term investments (Note 2) 1,000 1,000
Accounts receivable, less allowance for doubtful accounts of $363
in 1997 and $444 in 1996 12,469 11,296
Inventory 111,848 83,909
Deferred income taxes (Note 10) 1,424 --
Refundable income taxes -- 172
Other current assets 5,114 2,568
-------------------------------
Total current assets 134,140 100,152
Property and equipment, at cost:
Land 28,000 19,954
Buildings 53,507 35,379
Leasehold improvements 9,230 8,082
Furniture, fixtures and equipment 36,362 29,311
Vehicles 10,434 8,494
-------------------------------
137,533 101,220
Accumulated depreciation and amortization 29,093 21,435
-------------------------------
108,440 79,785
Notes receivable 2,280 1,510
Other assets 2,757 2,176
-------------------------------
Total assets $247,617 $183,623
===============================
</TABLE>
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(In Thousands, Except Share Data)
<S> <C> <C>
Liabilities and stockholders' equity Current liabilities:
Notes payable to bank (Note 4)
$ -- $ 3,000
Accounts payable 29,713 17,288
Accrued expenses 6,386 3,953
Accrued payroll 1,647 1,043
Income taxes payable 2,501 --
Deferred income taxes (Note 10) -- 311
Current portion of long-term debt (Note 5) 130 154
-------------------------------
Total current liabilities 40,377 25,749
Long-term debt, less current portion (Note 5) 22,641 237
Postretirement benefit obligation (Note 7) 415 403
Deferred income taxes (Note 10) 2,145 1,452
Stockholders' equity (Notes 8 and 11):
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 - 21,125,493 in 1997
and 20,937,014 in 1996 211 105
Additional paid-in capital 77,077 73,964
Retained earnings 104,751 81,713
-------------------------------
Total stockholders' equity 182,039 155,782
-------------------------------
Total liabilities and stockholders' equity $247,617 $183,623
===============================
See accompanying notes.
</TABLE>
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Thousands, Except Per Share Amounts)
Product sales $316,399 $259,243 $201,492
Cost of goods sold, including warehouse and distribution
expenses 181,789 150,772 116,768
Operating, selling, general and administrative expenses
(Note 3) 97,526 79,620 62,687
-----------------------------------------------------
279,315 230,392 179,455
-----------------------------------------------------
Operating income 37,084 28,851 22,037
Other income (expense):
Interest expense (139) (37) (299)
Interest income 198 676 342
Other, net 413 543 193
-----------------------------------------------------
472 1,182 236
-----------------------------------------------------
Income before income taxes 37,556 30,033 22,273
Provision for income taxes (Note 10) 14,413 11,062 8,182
-----------------------------------------------------
Net income $ 23,143 $ 18,971 $ 14,091
=====================================================
Basic earnings per common share:
Net income per common share $1.10 $.91 $.79
=====================================================
Weighted average common shares outstanding 21,043 20,864 17,820
=====================================================
Earnings per common share - assuming dilution: (Note 9)
Net income per common share - assuming dilution $1.09 $.90 $.79
=====================================================
Adjusted weighted average common shares outstanding 21,277 21,032 17,902
=====================================================
</TABLE>
See accompanying notes.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Retained
Shares Par Value Capital Earnings Total
- ------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 17,358 $ 87 $21,486 $48,651 $70,224
Issuance of common stock through public offering 3,200 16 47,696 -- 47,712
Issuance of common stock under employee benefit 92 1 1,191 -- 1,192
plans
Issuance of common stock under stock option plans 74 -- 651 -- 651
Net income -- -- -- 14,091 14,091
-----------------------------------------------------------
Balance at December 31, 1995 20,724 104 71,024 62,742 133,870
Issuance of common stock under employee benefit 93 -- 1,509 -- 1,509
plans
Issuance of common stock under stock option plans 120 1 1,431 -- 1,432
Net income -- -- -- 18,971 18,971
-----------------------------------------------------------
Balance at December 31, 1996 20,937 105 73,964 81,713 155,782
Two-for-one stock split (Note 11) -- 105 -- (105) --
Issuance of common stock under employee benefit 73 -- 1,331 -- 1,331
plans
Issuance of common stock under stock option plans 115 1 1,481 -- 1,482
Tax benefit of stock options exercised -- -- 301 -- 301
Net income -- -- -- 23,143 23,143
-----------------------------------------------------------
Balance at December 31, 1997 21,125 $211 $77,077 $104,751 $182,039
===========================================================
</TABLE>
See accompanying notes.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(In Thousands)
Operating activities
Net income $23,143 $18,971 $14,091
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,276 6,105 4,038
Provision for doubtful accounts 662 592 467
Gain on sale of property and equipment (44) (281) (14)
Deferred income taxes (1,042) 1,483 937
Common stock contributed to employee benefit plans 1,331 1,028 867
Tax benefit of stock options exercised 301 -- --
Postretirement benefits 12 12 10
Changes in operating assets and liabilities:
Accounts receivable (1,835) (2,428) (2,285)
Inventory (27,939) (24,930) (16,520)
Refundable income taxes 172 564 (736)
Other current assets (2,546) 130 (2,078)
Other assets (581) (709) (321)
Accounts payable 12,425 4,275 2,678
Accrued expenses 2,433 830 449
Accrued payroll 604 (765) 401
Income taxes payable 2,501 -- (1,104)
-----------------------------------------------------
Net cash provided by operating activities 17,873 4,877 880
Investing activities
Purchases of property and equipment (37,180) (34,459) (28,552)
Proceeds from sale of property and equipment 293 801 119
Purchases of short-term investments -- (12,494) (32,410)
Proceeds from sale of short-term investments -- 34,904 11,075
Payments received on notes receivable 898 51 47
Advances made on notes receivable (1,668) (21) (195)
-----------------------------------------------------
Net cash used in investing activities (37,657) (11,218) (49,916)
Financing activities
Borrowings on notes payable to bank -- 3,000 9,100
Payments on note payable to bank -- -- (9,100)
Proceeds from issuance of long-term debt 20,500 -- 15,776
Principal payments on long-term debt (1,120) (198) (15,959)
Net proceeds from issuance of common stock 1,482 1,913 48,688
----------------------------------------------------
Net cash provided by financing activities 20,862 4,715 48,505
----------------------------------------------------
Net increase (decrease) in cash 1,078 (1,626) (531)
Cash at beginning of year 1,207 2,833 3,364
----------------------------------------------------
Cash at end of year $2,285 $1,207 $2,833
====================================================
</TABLE>
See accompanying notes.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
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 Missouri,
Kansas, Oklahoma, Arkansas, Iowa and Nebraska. Additionally, upon the closing of
the acquisition of Hi-Lo Automotive, Inc. ("Hi/LO") effective January 31, 1998,
the Company has operations in Texas, Louisiana and California. See Note 13.
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 $119,135,000 and $91,011,000 as of December 31, 1997
and 1996, 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. Service lives for principal assets range from 3 to 40 years for property
and equipment. Maintenance and repairs are charged to expense as incurred.
The Company capitalizes interest costs as a component of construction in
progress, based on the weighted average rates paid for long-term borrowings.
Total interest costs capitalized for the years ended December 31, 1997 and 1995,
were $527,000 and $168,000, respectively. No capitalized interest costs were
recorded for the year ended December 31, 1996.
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.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense charged
to operations amounted to $3,437,000, $3,156,000 and $2,797,000 for the years
ended December 31, 1997, 1996 and 1995, 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.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed in Note 8, the alternative fair value accounting provided for under
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share." SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS 128 requirements.
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
pre-established 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.
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 $2,271,000 and
$1,495,000 at December 31, 1997 and 1996, respectively, bears interest at 6% and
is due in January 2005.
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
The Company's short-term investments are classified as available-for-sale in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and are carried at cost, which approximates fair market
value. At December 31, 1997 and 1996, short-term investments consisted of
preferred equity securities.
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
$2,122,000 in 1997, $1,729,000 in 1996 and $1,701,000 in 1995.
NOTE 4 - NOTES PAYABLE TO BANKS
At December 31, 1996, the Company had available short-term unsecured bank lines
of credit for maximum borrowings of $32 million under which $3,000,000 was
outstanding. The lines of credit bore interest at LIBOR plus 1.00% to 1.25%, and
expired during 1997 and were replaced with the long-term credit facilities
described in Note 5.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 5 - LONG-TERM DEBT
The Company has available an unsecured bank line of credit providing for maximum
borrowings of $32.5 million under which $15,700,000 was outstanding at December
31, 1997. The line of credit, which bears interest at LIBOR plus 0.50% (6.22% at
December 31, 1997), expires in October 2000. (See Note 13.)
The Company also has available an unsecured revolving credit facility with a
bank providing for maximum borrowings of $32.5 million, under which $6,800,000
was outstanding at December 31, 1997. This credit facility bears interest at
LIBOR plus 0.50% (6.22% at December 31, 1997) and matures in September 2000.
This agreement requires the Company to maintain various minimum financial
ratios. (See Note 13.)
Additionally, the Company has various unsecured notes payable to individuals,
amounting to $271,000 and $391,000, at December 31, 1997 and 1996, respectively.
The notes bear interest at rates ranging from 6% to 9% and are due in monthly
installments of approximately $25,000 including interest. The notes mature in
varying amounts between 1998 and 2000, and $118,000 of such notes are guaranteed
by certain stockholders of the Company.
Indirect borrowings under letters of credit and guarantees of indebtedness of
others totaled $633,000 and $636,000 at December 31, 1997 and 1996,
respectively.
Principal maturities of long-term debt for each of the next five years ending
December 31, after giving effect to the refinancing described in Note 13, are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 130
1999 98
2000 43
2001 --
2002 --
Thereafter 22,500
----------
$22,771
==========
</TABLE>
Cash paid by the Company for interest during the years ended December 31, 1997,
1996 and 1995 amounted to $642,000, $35,000 and
$581,000, 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 $2,142,000 per year through 1999 and $250,000 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>
1998 $ 4,239
1999 3,951
2000 1,790
2001 1,569
2002 1,244
Thereafter 14,948
--------
$27,741
=========
</TABLE>
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 6 - COMMITMENTS (CONTINUED)
Rental expense amounted to $4,136,000,
$3,348,000, and $3,316,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Construction commitments totaled approximately $5.4 million at December 31,
1997.
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 $1,485,000 in 1997, $1,229,000
in 1996 and $980,000 in 1995. 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>
<S> <C> <C>
Market
Shares Value
----------------- -----------------
1997 20,913 $415,000
1996 19,786 344,000
1995 21,348 297,000
</TABLE>
Profit-sharing contributions accrued at December 31, 1997, 1996 and 1995 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>
1997 49,540 $884,000
1996 39,652 684,000
1995 43,018 570,000
</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 are 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, 1997, 1996
and 1995 were $12,000, $12,000 and $10,000, respectively.
Additionally, the Company has adopted a stock purchase plan covering an
aggregate of 500,000 shares of common stock under which approximately 350,000
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, 32,584 shares were issued at an
average price of $17.49 per share during 1997, 32,936 shares were issued at an
average price of $14.61 per share during 1996 and 27,568 shares were issued at
an average price of $11.77 per share during 1995.
The Company adopted a performance incentive plan for the Company's senior
management under which 200,000 shares of restricted stock are reserved for
future issuance. Under the plan, 1,386 and 556 shares were issued during 1997
and 1996, respectively. No shares were issued under this plan in 1995.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 8 - STOCK OPTION PLANS
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 2,000,000 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>
<S> <C> <C>
Number
Price per Share of Shares
------------------------ ----------------
Outstanding at December 31, 1994 $8.75 - $16.88 605,550
Granted 11.88 - 16.25 240,500
Exercised 8.75 - 13.00 (73,550)
Canceled 8.75 - 16.13 (9,500)
------------------------ ----------------
Outstanding at December 31, 1995 8.75 - 16.88 763,000
Granted 14.38 - 20.00 51,500
Exercised 8.75 - 15.50 (120,300)
Canceled 13.25 - 19.54 (35,500)
------------------------ ----------------
Outstanding at December 31, 1996 8.75 - 20.00 658,700
Granted 15.63 - 28.00 755,000
Exercised 8.75 - 18.38 (71,500)
Canceled 8.75 - 17.88 (6,000)
------------------------ ----------------
Outstanding at December 31, 1997 $8.75 - $28.00 1,336,200
======================== ================
</TABLE>
Options to purchase 521,700, 637,700 and 522,500 shares of common stock were
exercisable at December 31, 1997, 1996 and 1995, respectively.
The Company also maintains a stock option plan for nonemployee directors of the
Company under which 100,000 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>
<S> <C> <C>
Number
Price per Share of Shares
----------------- --------------
Outstanding at December 31, 1994 $8.75 - $13.13 20,000
Granted 13.50 10,000
----------------- --------------
Outstanding at December 31, 1995 8.75 - 13.50 30,000
Granted 18.19 10,000
----------------- --------------
Outstanding at December 31, 1996 8.75 - 18.19 40,000
Granted 18.56 - 20.88 15,000
Exercised 8.75 - 18.19 (20,000)
Canceled 18.56 (5,000)
----------------- --------------
Outstanding at December 31, 1997 $8.75 - $18.19 30,000
================= ==============
</TABLE>
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
All options under this plan were exercisable at December 31, 1997, 1996 and
1995.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee and nonemployee director stock options under the fair value method of
that SFAS.
The fair values for these options were estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
5.53%, 5.39% and 5.43%; volatility factors of the expected market price of the
Company's common stock of .200, .200 and .273; and weighted-average expected
life of the options of 6.4, 3.5 and 3.5 years. The Company assumed a 0% dividend
yield over the expected life of the options. The weighted-average fair values of
options granted during the years ended December 31, 1997, 1996 and 1995 were
$8.28, $4.79 and $4.09, respectively. The weighted-average remaining contract
life at December 31, 1997 for all outstanding options under the Company's stock
option plans is 5.6 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing model does not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The effects of
applying SFAS No. 123 for pro forma disclosures are not likely to be
representative of the effects on reported net income or losses for future years.
The Company's pro forma information follows: (amounts in thousands, except per
share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
---------- --------- ---------
Pro forma net income $22,432 $18,494 $13,889
========== ========= =========
Pro forma basic earnings per share $1.07 $0.89 $0.78
========== ========= =========
Pro forma earnings per share -
assuming dilution $1.05 $0.88 $0.78
========== ========= =========
</TABLE>
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 9 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended December 31, 1997 1996 1995
- ----------------------------------------------- --------- --------- ---------
(In thousands, except per share amounts)
Numerator:
Net income $23,143 $18,971 $14,091
--------- --------- ---------
Numerator for basic earnings per share $23,143 $18,971 $14,091
========= ========= =========
Numerator for diluted earnings per share $23,143 $ 18,971 $14,091
========= ========= =========
Denominator:
Denominator for basic earnings per share
- weighted-average shares 21,043 20,864 17,820
Effect of employee stock options (Note 8) 234 168 82
--------- --------- ---------
Denominator for diluted earnings per
per share - adjusted weighted-average
shares and assumed conversions 21,277 21,032 17,902
========== ========= =========
Basic earnings per share $1.10 $.91 $.79
========== ========= =========
Diluted earnings per share $1.09 $.90 $.79
========== ========= =========
</TABLE>
For additional disclosure regarding the employee stock options, see Note 8.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 10 - 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):
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---------------- ----------------
Deferred tax assets:
Current
Allowance for doubtful accounts $138 $168
Vacation accrual 567 481
Inventory carrying value 636 --
Other accruals 83 152
---------------- ----------------
1,424 801
---------------- ----------------
Noncurrent:
Postretirement benefit obligation 158 153
---------------- ----------------
Total deferred tax assets 1,582 954
---------------- ----------------
Deferred tax liabilities:
Current:
Inventory carrying value -- 1,112
---------------- -----------------
Noncurrent:
Depreciation 2,273 1,605
Other accruals 30 --
---------------- -----------------
Total deferred tax liabilities 2,303 2,717
---------------- -----------------
Net deferred tax liabilities $ 721 $1,763
================ =================
</TABLE>
The provision for income taxes consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current Deferred Total
------------------- --------------------- ------------------
1997:
Federal $13,562 ($ 915) $12,647
State 1,893 (127) 1,766
------------------- --------------------- ------------------
$15,455 ($1,042) $14,413
=================== ===================== ==================
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
=================== ===================== ==================
</TABLE>
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 10 - INCOME TAXES (CONTINUED)
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>
1997 1996 1995
---------------------------------------
<S> <C> <C> <C>
Federal income taxes at statutory rate $13,145 $10,512 $7,796
State income taxes, net of federal tax benefit 1,148 809 567
Other items, net 120 (259) (181)
---------------------------------------
$14,413 $11,062 $8,182
=======================================
</TABLE>
The tax benefit associated with the exercise of non-qualified stock options has
been reflected as additional paid-in capital in the accompanying financial
statements.
During the years ended December 31, 1997, 1996 and 1995, cash paid by the
Company for income taxes amounted to $12,168,000, $9,015,000 and $9,085,000,
respectively.
NOTE 11 - STOCK SPLIT
On July 8, 1997, the Company's Board of Directors declared a two-for-one stock
split to be effected in the form of a 100% stock dividend payable to all
shareholders of record as of July 31, 1997. The stock dividend was paid on
August 31, 1997. Accordingly, the stock split has been recognized by
reclassifying $105,000, the par value of the additional shares resulting from
the split, from retained earnings to common stock. All share and per share
information included in the accompanying consolidated financial statements has
been restated to reflect the retroactive effect of the stock split for all
periods presented.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
NOTE 12 - QUARTERLY FINANCIAL DATA - UNAUDITED
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Year ended December 31, 1997
Product sales $68,472 $82,448 $87,517 $77,962
Gross profit 29,191 34,715 36,531 34,173
Operating income 7,928 9,493 10,467 9,196
Net income 5,007 6,082 6,621 5,433
Basic net income per share: .24 .29 .31 .26
Net income per share - assuming dilution .24 .29 .31 .25
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
Basic net income per share: .20 .24 .26 .22
Net income per share - assuming dilution .20 .24 .26 .21
</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.
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with SFAS No. 128, "Earnings per Share."
NOTE 13 - SUBSEQUENT EVENTS
Effective January 31, 1998, the Company acquired 100% of the outstanding capital
stock of Hi-Lo Automotive, Inc. and its subsidiaries. Hi/LO is a specialty
retailer which operates 189 retail stores throughout Texas, Louisiana and
California, supplying automotive after-market tools, supplies and accessories.
Hi/LO had sales of approximately $238.3 million for the year ended December 31,
1997. The purchase price was approximately $47.8 million, or $4.35 per common
share. This acquisition will be accounted for using the purchase method of
accounting.
In connection with this purchase, the Company replaced its existing credit
facilities with a new $175 million credit agreement. This credit agreement
includes a five-year revolving credit facility of $125 million, maturing in
January 2003, of which $10 million is a swing line facility to fund short-term
financing requirements, and a five-year term loan facility of $50 million which
is payable in quarterly installments. This credit agreement is guaranteed by the
subsidiaries of the Company and the acquired Hi/LO subsidiaries.
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
NUMBER OF STOCKHOLDERS
As of December 31, 1997, O'Reilly Automotive, Inc. has approximately 7,500
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>
1997 1996
High Low High Low
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
First Quarter 19.063 15.500 17.750 14.375
Second Quarter 19.875 16.875 20.375 17.500
Third Quarter 26.000 18.875 19.125 17.125
Fourth Quarter 28.000 21.000 18.500 15.500
For The Year 28.000 15.500 20.375 14.375
</TABLE>
<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
Hi-Lo Automotive, Inc. Delaware
One hundred percent of the capital stock of each of the above listed
subsidiaries is directly owned by O'Reilly Automotive, Inc.
<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 16,
1998, included in the 1997 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, in the
Registration Statement (Form S-8 No. 33-73892) pertaining to the O'Reilly
Automotive, Inc. Profit Sharing and Savings Plan and in the Registration
Statement (Form S-8 No. 33-91022) pertaining to the O'Reilly Automotive
Performance Incentive Plan and 1993 Stock Option Plan of our report dated
February 16, 1998, 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. for the year ended
December 31, 1997.
/ s / Ernst & Young LLP
- ---------------------------------
Ernst & Young LLP
Kansas City, Missouri
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1997 and 1996 (restated) and the
Consolidated Statement of Income for the Twelve Months Ended December 31, 1997
and 1996 (restated) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US Dollar
<S> <C> <C>
<PERIOD-TYPE> 12-Mos 12-Mos
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<EXCHANGE-RATE> 1.00 1.00
<CASH> $2,285 $1,207
<SECURITIES> 1,000 1,000
<RECEIVABLES> 12,832 11,740
<ALLOWANCES> 363 444
<INVENTORY> 111,848 83,909
<CURRENT-ASSETS> 6,538 2,740
<PP&E> 137,533 101,220
<DEPRECIATION> 29,093 21,435
<TOTAL-ASSETS> 247,617 183,623
<CURRENT-LIABILITIES> 40,377 25,749
<BONDS> 0 0
0 0
0 0
<COMMON> 211 105
<OTHER-SE> 181,828 155,677
<TOTAL-LIABILITY-AND-EQUITY> 247,617 183,623
<SALES> 316,399 259,243
<TOTAL-REVENUES> 317,010 260,462
<CGS> 181,789 150,772
<TOTAL-COSTS> 97,526 79,620
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 757 672
<INTEREST-EXPENSE> 139 37
<INCOME-PRETAX> 37,556 30,033
<INCOME-TAX> 14,413 11,062
<INCOME-CONTINUING> 23,143 18,971
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23,143 18,971
<EPS-PRIMARY> $1.10 $0.91
<EPS-DILUTED> $1.09 $0.90
</TABLE>
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.
