<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 12, 1999
O'REILLY AUTOMOTIVE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Missouri 0-21318 44-0618012
- -------------------------------- -------------------- --------------------
(State or other jurisdiction) (Commission File No.) (I.R.S. Employer
Identification No.)
233 South Patterson, Springfield, Missouri 65802
- ------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (417) 862-2674
ITEM 5. Other Events
This Current Report on Form 8-K is being filed to provide the historical
financial statements of O'Reilly Automotive, Inc., a Missouri corporation (the
"Company"), as of the year ended December 31, 1998. In addition, the Company has
included Selected Financial Data (pursuant to Item 301 of Regulation S-K) and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for (i) the year ended December 31, 1998 compared to the year ended
December 31, 1997 and (ii) the year ended December 31, 1997 compared to the year
ended December 31, 1996 (pursuant to Item 303 of Regulation S-K).
ITEM 7(c). Exhibits
The following exhibits are included as part of this Current Report on Form
8-K in connection with the filing of the Company's financial statements:
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule (for SEC use only)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data and
other operating information. The selected consolidated financial data is
derived from our consolidated financial statements which have been audited by
Ernst & Young LLP, independent auditors. The selected consolidated financial
data should be read in conjunction with the consolidated financial statements,
related notes, and other financial information included or incorporated by
reference herein.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1994 1995 1996 1997 1998
(In thousands, except per share and
operating data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Product sales.............. $167,057 $201,492 $259,243 $316,399 $616,302
Cost of goods sold,
including warehouse and
distribution expenses..... 97,758 116,768 150,772 181,789 358,439
-------- -------- -------- -------- --------
Gross profit............... 69,299 84,724 108,471 134,610 257,863
Operating, selling, general
and administrative
expenses.................. 52,142 62,687 79,620 97,526 200,962
-------- -------- -------- -------- --------
Operating income........... 17,157 22,037 28,851 37,084 56,901
Other income (expense),
net....................... 376 236 1,182 472 (6,958)
-------- -------- -------- -------- --------
Income before income taxes. 17,533 22,273 30,033 37,556 49,943
Provision for income taxes. 6,461 8,182 11,062 14,413 19,171
-------- -------- -------- -------- --------
Net income................. $ 11,072 $ 14,091 $ 18,971 $ 23,143 $ 30,772
======== ======== ======== ======== ========
Net income per common
share..................... $ 0.64 $ 0.79 $ 0.91 $ 1.10 $ 1.45
======== ======== ======== ======== ========
Net income per common
share--assuming dilution.. $ 0.64 $ 0.79 $ 0.90 $ 1.09 $ 1.42
======== ======== ======== ======== ========
Weighted average common
shares outstanding........ 17,310 17,820 20,864 21,043 21,238
Weighted average common
shares outstanding--
assuming dilution......... 17,389 17,902 21,032 21,277 21,602
Selected Operating Data:
Number of stores at
beginning of year......... 145 165 188 219 259
Net stores added (a)....... 20 23 31 40 232(b)
Number of stores at year
end....................... 165 188 219 259 491
Total store square footage
at year end (in 000's)
(c)....................... 785 923 1,155 1,454 3,172
Weighted average product
sales per store (in 000's)
(c)....................... $ 1,007 $ 1,101 $ 1,239 $ 1,306 $ 1,368
Percentage increase in same
store product sales (d)... 8.9% 8.9% 14.4% 6.8% 6.8%
<CAPTION>
As of December 31,
------------------------------------------------
1994 1995 1996 1997 1998
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital............ $ 41,416 $ 80,471 $ 74,403 $ 93,763 $208,363
Total assets............... 87,327 153,604 183,623 247,617 493,288
Short-term debt............ 311 231 3,154 130 13,691
Long-term debt, less
current portion........... 461 358 237 22,641 170,166
Shareholders' equity....... 70,224 133,870 155,782 182,039 218,394
</TABLE>
- ---------------------
(a) Two stores were closed during 1997 and one was closed in 1998. Additionally,
seven former Hi-Lo Automotive, Inc. stores located in California were sold
in 1998. No other stores were closed or sold during the periods presented.
(b) Reflects 182 net stores acquired in the acquisition of Hi-Lo and 50 net
stores opened.
(c) Total square footage includes normal selling, office, stockroom and
receiving space. Weighted average product sales per store are weighted to
consider the approximate dates of store openings.
(d) We calculate same store product sales based on the change in product sales
of only those stores open during both full periods being compared. We
calculate the percentage increase in same store product sales based on
store sales results which exclude sales of specialty machinery, sales by
outside salesmen and sales to employees.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition, results of operations
and liquidity and capital resources should be read in conjunction with our
consolidated financial statements, related notes and other financial
information included elsewhere in this prospectus.
We are one of the largest specialty retailers of automotive aftermarket
parts, tools, supplies, equipment and accessories in the United States, selling
our products to both do-it-yourself, or DIY, customers and professional
installers. Our stores carry an extensive product line consisting of new and
remanufactured automotive hard parts, maintenance items and accessories, and a
complete line of autobody paint and related materials, automotive tools and
professional service equipment.
In January 1998, we acquired Hi-Lo for a cash purchase price of
approximately $49.3 million. At the time of the acquisition, Hi-Lo had $43.2
million of existing debt, among other liabilities, which we assumed. Through the
Hi-Lo acquisition, we acquired a net of 182 stores and a 425,000 square foot
distribution center located in Houston, Texas.
We calculate same store product sales based on the change in product sales
of only those stores open during both full periods being compared. We calculate
the percentage increase in same store product sales based on store sales
results which exclude sales of specialty machinery, sales by outside salesmen
and sales to employees.
Cost of goods sold consists primarily of product costs and warehouse and
distribution expenses. Cost of goods sold as a percentage of product sales may
be affected by variations in our product mix, price changes in response to
competitive factors and fluctuations in merchandise costs and vendor programs.
Operating, selling, general and administrative expenses consist primarily of
store payroll, store occupancy, advertising expenses, other store expenses and
general and administrative expenses, including salaries and related benefits of
corporate employees, administrative office occupancy expenses, data processing,
professional expenses and other related expenses.
Results of Operations
The following table sets forth certain of our summary income statement data
as a percentage of product sales for the years indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1997 1998
<S> <C> <C> <C>
Product sales.............................. 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse and
distribution expenses..................... 58.2 57.5 58.2
-------- -------- --------
Gross profit............................... 41.8 42.5 41.8
Operating, selling, general and
administrative
expenses.................................. 30.7 30.8 32.6
-------- -------- --------
Operating income........................... 11.1 11.7 9.2
Other income (expense)..................... 0.5 0.1 (1.1)
-------- -------- --------
Income before income taxes................. 11.6 11.8 8.1
Provision for income taxes................. 4.3 4.5 3.1
-------- -------- --------
Net income................................. 7.3% 7.3% 5.0%
======== ======== ========
</TABLE>
2
<PAGE>
1998 Compared to 1997
Product sales increased $299.9 million, or 94.8% from $316.4 million in
1997 to $616.3 million in 1998 due to 182 net additional stores acquired from
Hi-Lo, 50 net additional stores opened during 1998, and a $33.1 million, or
6.8% increase in same store product sales. We believe that the customer
acceptance experienced by these new stores and the increased product sales
achieved by the existing stores is the result of our offering of a broader
selection of stock keeping units in most stores, an increased promotional and
advertising effort through a variety of media and localized promotional
events, and continued improvement in the merchandising and store layouts of
most stores. Also, our continued focus on serving professional installers
contributed to increased sales.
Gross profit increased 91.6% from $134.6 million (or 42.5% of product
sales) in 1997 to $257.9 million (or 41.8% of product sales) in 1998. The
decrease in gross profit margin was primarily attributable to the inclusion of
eleven months of Hi-Lo operations, which resulted in a higher cost of sales.
The decrease was offset partially by continued improvements in our product
acquisition programs and conversions in the product lines in the Hi-Lo stores.
Operating, selling, general and administrative expenses increased $103.4
million from $97.5 million (or 30.8% of product sales) in 1997 to $201.0
million (or 32.6% of product sales) in 1998. The increase in these expenses in
dollar amount and as a percentage of sales primarily resulted from the Hi-Lo
acquisition and net store openings, as well as the addition of team members
and facilities to support the increased level of our operations.
Other income (expense) decreased by $7.5 million from income of $0.5
million in 1997 to expense of $7.0 million in 1998, primarily due to increased
interest expense from higher balances on long-term debt principally resulting
from the Hi-Lo acquisition and growth in the scope of our operations.
Our provision for income taxes was 38.4% of income before income taxes in
1998 and 1997.
Principally as a result of the foregoing, net income in 1998 was $30.8
million, or 5.0% of product sales, an increase of $7.6 million (or 33.0%) from
net income in 1997 of $23.1 million, or 7.3% of product sales.
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 40 net additional stores opened during
1997 and a $15.6 million, or 6.8%, increase in same store product sales. We
believe that the customer acceptance experienced by these new stores and the
increased product sales achieved by the existing stores is the result of our
continuation of media advertising during 1997 at levels comparable to those
set in 1996, an increase in the broad selection of stock keeping units at the
newer or recently renovated or relocated stores, the increase in inventory
levels at most stores, and the increasing penetration of the general
geographic markets in which we operate.
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 our obtaining increased volume discounts and other
economies of scale. The increase was partially offset by continued price
competition among automotive parts retailers.
3
<PAGE>
Operating, selling, general and administrative 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 these
expenses resulted primarily from the new store openings and additions to
administrative staff and facilities which occurred during 1997 in order to
support our increased level of operations.
Our 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 our 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.
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.
Liquidity and Capital Resources
Net cash provided by operating activities was $4.9 million in 1996 and $17.9
million in 1997. Net cash used in operating activities was $19.1 million in
1998. 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 in 1997 of 40 net stores and an increase in inventory levels at most
stores and the distribution centers. The net cash used in operating activities
in 1998 is principally the result of increases in inventory, amounts receivable
from vendors, refundable income taxes, accounts receivable and accrued payroll,
net of increases in accounts payable and deferred income taxes. The increase in
inventory is due to the addition of 50 net stores, an increase in inventory
levels at many stores particularly the acquired Hi-Lo stores and increases in
inventory at the Oklahoma City distribution center, due to its expansion, and
the Houston distribution center, to improve order fill and service levels.
Net cash used in investing activities was $11.2 million in 1996, $37.7
million in 1997 and $100.8 million in 1998. 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. The increase in cash used in
1998 was primarily due to the purchase of Hi-Lo and increased capital
expenditures.
Capital expenditures were $34.5 million in 1996, $37.2 million in 1997 and
$57.7 million in 1998. These expenditures were primarily related to the opening
of new stores as well as the relocation or remodeling of existing stores. We
opened 31 new stores and remodeled or relocated 32 stores in 1996. In 1997, we
opened 40 net stores and remodeled or relocated 28 stores. In 1998, we opened
50 net stores and renovated or relocated 18 stores. Also, in 1996, 1997 and
1998, we purchased real estate for new stores and store relocations totaling
approximately $7.8 million, $8.1 million and $9.9 million, respectively. In
1997, we purchased real estate for the Des Moines distribution center totaling
$0.7 million. Construction costs for the Des Moines distribution center, which
is scheduled to be completed in April 1999, totaled $3.7 million at December
31, 1998.
Our continuing store expansion program requires significant capital
expenditures and working capital principally for inventory requirements. The
costs associated with the opening of a new store (including the cost of land
acquisition, improvements, fixtures, inventory and computer equipment) are
estimated to average approximately $900,000 to $1.1 million; however, such
costs may be
4
<PAGE>
significantly reduced where we lease, rather than purchase, 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, we estimate that the average cost to
acquire such a business and convert it to one of our stores is approximately
$400,000. We plan to finance our expansion program through cash expected to be
provided from operating activities and available borrowings, after the
application of the proceeds from this offering.
On July 8, 1997, our 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 order to fund the Hi-Lo acquisition, our continuing store expansion
program, and our working capital and general corporate needs, we replaced our
lines of credit in January 1998 with an unsecured, five-year syndicated credit
facility totaling $173 million. The facility is comprised of a $125 million
revolving loan, a $5 million sublimit for the issuance of letters of credit and
a $48 million term loan. This credit facility is guaranteed by our
subsidiaries. At December 31, 1998, the effective interest rate on the
revolving and term loan portions, which each mature on January 27, 2003, was
6.22% per annum. At December 31, 1998, there were no borrowings available under
this credit facility.
In January 1999, we amended the above credit facility to increase the amount
available under the revolving facility by $35 million. The additional $35
million is available until July 31, 1999 or until a "capital markets event"
occurs. We believe that this offering will constitute a capital markets event.
The additional $35 million bears interest at the same rate as the revolving
credit facility discussed above.
We believe that the proceeds from this offering, combined with our existing
cash, short-term investments, cash expected to be provided by operating
activities, available bank credit facilities and trade credit will be
sufficient to fund both our short and long-term capital needs for the
foreseeable future.
Inflation and Seasonality
We succeeded, 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, we do not believe that our operations have been
materially affected by inflation.
Our business is somewhat seasonal 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.
Quarterly Results
The following table sets forth certain quarterly unaudited operating data
for fiscal 1997 and 1998. The unaudited quarterly information includes all
adjustments which management considers necessary for a fair presentation of the
information shown.
5
<PAGE>
The unaudited operating data presented below should be read in conjunction
with our consolidated financial statements and related notes included elsewhere
in this prospectus, and the other financial information included herein.
<TABLE>
<CAPTION>
Fiscal 1997
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
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
Net income per common share................ 0.24 0.29 0.31 0.26
Net income per common share--assuming
dilution.................................. $ 0.24 $ 0.29 $ 0.31 $ 0.25
<CAPTION>
Fiscal 1998
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
Product sales.............................. $118,269 $165,242 $172,784 $160,007
Gross profit............................... 50,669 66,201 69,345 71,648
Operating income........................... 10,602 13,745 15,435 17,119
Net income................................. 5,819 7,672 8,361 8,920
Net income per common share................ 0.28 0.36 0.39 0.42
Net income per common share--assuming
dilution.................................. $ 0.27 $ 0.36 $ 0.39 $ 0.41
</TABLE>
Year 2000 Issue
We have appointed an internal Year 2000 issue project manager and
remediation team and have adopted a four phase approach of assessment,
remediation, testing and contingency planning. The scope of the project
includes our review of all internal software, hardware and operating systems
and an assessment of the risk to our business posed by any lack of vendor
preparedness with respect to the Year 2000 issue. We have completed the initial
assessment of all internal systems, are progressing with the remediation and
testing phases, and have begun contingency planning for information technology
systems. We believe that this approach of assessment (including prioritization
by business risk), remediation (including conversions to new software), testing
of necessary changes, and contingency planning will minimize the business risk
of the Year 2000 issue from internal systems.
We are utilizing internal personnel to correct, replace and test our
software and plan to complete the Year 2000 project no later than September 1,
1999. The total cost of the Year 2000 project is estimated at $100,000. Of the
total project cost, approximately $25,000 represents the purchase of
replacements or upgrades of software and hardware, which will be capitalized.
We will expense the remaining portion of the project cost as incurred during
1999. As of December 31, 1998, we had spent approximately $33,060 on the Year
2000 project.
We have established ongoing communications with all our significant vendors
to monitor their progress in resolving their issues related to the Year 2000
issue. Many of such vendors have informed us that they are making substantial
progress in resolving their Year 2000 issue. However, the most likely worst
case scenario for us would entail failure of one or more of our significant
vendors to continue operations (even temporarily) following transition to the
year 2000. We have also contacted suppliers of products significant to our
operations containing embedded chips to
6
<PAGE>
monitor their progress in resolving issues related to the Year 2000 issue. No
material issues have been identified to date as a result of these contacts. We
cannot guarantee that our business partners will adequately address issues
related to the Year 2000 issue in a timely manner or that the failure of our
business partners to correct these issues would not have a material adverse
effect on the Company.
We have completed contingency plans to be used in the event of a business
interruption caused by the Year 2000 issue for some, but not all, of our
internal information technology systems. Such plans are being developed for
some of our other systems. Elements of our contingency plans include switching
vendors and utilizing back-up systems that do not rely on computers.
The cost and time estimated for the Year 2000 project are based on our best
current estimates. We cannot guarantee that these estimates will be achieved
and that planned results will be achieved.
New Accounting Standards
Recent pronouncements of the FASB, which we were required to adopt in 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 displaying
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 adoption of SFAS No. 130 had no
effect on our financial statements since we have no items of comprehensive
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 adoption of
SFAS No. 131 had no effect on our financial statements since we operate in a
single segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted in years beginning after June 15, 1999. The Company does
not anticipate that the adoption of SFAS No. 133 will have a significant effect
on the financial position or results of operations of the Company.
7
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors............................................. F-3
Audited Consolidated Financial Statements
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Income.......................................... F-6
Consolidated Statements of Shareholders' Equity............................ F-7
Consolidated Statements of Cash Flows...................................... F-8
Notes to Consolidated Financial Statements................................. F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
O'Reilly Automotive, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of O'Reilly
Automotive, Inc. and Subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of O'Reilly
Automotive, Inc. and Subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Kansas City, Missouri
March 2, 1999
F-2
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
(In thousands,
except share
data)
<S> <C> <C>
Assets
Current assets:
Cash....................................................... $ 2,285 $ 1,728
Short-term investments..................................... 1,000 500
Accounts receivable, less allowance for doubtful accounts
of $363 in 1997
and $613 in 1998.......................................... 12,469 27,580
Amounts receivable from vendors............................ 4,969 26,660
Inventory.................................................. 111,848 246,012
Refundable income taxes.................................... -- 3,026
Deferred income taxes...................................... 1,424 2,838
Other current assets....................................... 145 2,538
-------- --------
Total current assets................................... 134,140 310,882
Property and equipment, at cost:
Land....................................................... 28,000 40,131
Buildings.................................................. 53,507 81,770
Leasehold improvements..................................... 9,230 17,898
Furniture, fixtures and equipment.......................... 36,362 56,897
Vehicles................................................... 10,434 13,511
-------- --------
137,533 210,207
Accumulated depreciation and amortization.................. 29,093 39,256
-------- --------
108,440 170,951
Deferred income taxes........................................ -- 3,178
Notes receivable............................................. 2,280 4,137
Other assets................................................. 2,757 4,140
-------- --------
Total assets........................................... $247,617 $493,288
======== ========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
(In thousands,
except share
data)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Note payable to bank....................................... $ -- $ 5,000
Accounts payable........................................... 29,713 66,737
Accrued expenses........................................... 6,386 18,446
Accrued payroll............................................ 1,647 3,645
Income taxes payable....................................... 2,501 --
Current portion of long-term debt.......................... 130 8,691
-------- --------
Total current liabilities................................ 40,377 102,519
Long-term debt, less current portion......................... 22,641 170,166
Other liabilities............................................ 415 2,209
Deferred income taxes........................................ 2,145 --
Shareholders' equity:
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
21,349,700 in 1998...................................... 211 213
Additional paid-in capital................................. 77,077 82,658
Retained earnings.......................................... 104,751 135,523
-------- --------
Total shareholders' equity............................. 182,039 218,394
-------- --------
Total liabilities and shareholders' equity............. $247,617 $493,288
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
(In thousands, except per
share data)
<S> <C> <C> <C>
Product sales.................................... $259,243 $316,399 $616,302
Cost of goods sold, including warehouse and
distribution expenses........................... 150,772 181,789 358,439
Operating, selling, general and administrative
expenses........................................ 79,620 97,526 200,962
-------- -------- --------
230,392 279,315 559,401
-------- -------- --------
Operating income................................. 28,851 37,084 56,901
Other income (expense):
Interest expense............................... (37) (139) (8,126)
Interest income................................ 676 198 396
Other, net..................................... 543 413 772
-------- -------- --------
1,182 472 (6,958)
-------- -------- --------
Income before income taxes....................... 30,033 37,556 49,943
Provision for income taxes....................... 11,062 14,413 19,171
-------- -------- --------
Net income....................................... $ 18,971 $ 23,143 $ 30,772
======== ======== ========
Basic income per common share:
Net income per common share...................... $ 0.91 $ 1.10 $ 1.45
======== ======== ========
Weighted average common shares outstanding....... 20,864 21,043 21,238
======== ======== ========
Income per common share--assuming dilution:
Net income per common share--assuming dilution... $ 0.90 $ 1.09 $ 1.42
======== ======== ========
Adjusted weighted average common shares
outstanding..................................... 21,032 21,277 21,602
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
---------------- Paid-In Retained
Shares Par Value Capital Earnings Total
------ --------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... 20,724 $104 $71,024 $ 62,742 $133,870
Issuance of common stock under
employee benefit plans....... 93 -- 1,509 -- 1,509
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....... -- 105 -- (105) --
Issuance of common stock under
employee benefit plans....... 73 -- 1,331 -- 1,331
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
Issuance of common stock under
employee benefit plans....... 92 1 2,720 -- 2,721
Issuance of common stock under
stock option plans........... 133 1 2,022 -- 2,023
Tax benefit of stock options
exercised.................... -- -- 839 -- 839
Net income.................... -- -- -- 30,772 30,772
------ ---- ------- -------- --------
Balance at December 31, 1998.... 21,350 $213 $82,658 $135,523 $218,394
====== ==== ======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Operating activities
Net income...................................... $ 18,971 $ 23,143 $ 30,772
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 6,105 8,276 12,164
Provision for doubtful accounts............... 592 662 250
Gain on sale of property and equipment........ (281) (44) (134)
Deferred income taxes......................... 1,483 (1,042) 7,629
Common stock contributed to employee benefit
plans........................................ 1,028 1,331 1,629
Tax benefit of stock options exercised........ -- 301 839
Postretirement benefits....................... 12 12 12
Changes in operating assets and liabilities,
net of the effects of the acquisition:
Accounts receivable......................... (2,428) (1,835) (5,809)
Amounts receivable from vendors............. (473) (2,100) (21,691)
Inventory................................... (24,930) (27,939) (53,328)
Refundable income taxes..................... 564 172 (5,527)
Other current assets........................ 603 (446) (179)
Other assets................................ (709) (581) (1,753)
Accounts payable............................ 4,275 12,425 20,071
Accrued expenses............................ 830 2,433 (525)
Accrued payroll............................. (765) 604 (3,533)
Income taxes payable........................ -- 2,501 --
-------- -------- --------
Net cash provided by (used in) operating
activities............................... 4,877 17,873 (19,113)
Investing activities
Purchases of property and equipment............. (34,459) (37,180) (57,732)
Acquisition, net of cash acquired............... -- -- (49,296)
Proceeds from sale of property and equipment.... 801 293 6,038
Purchases of short-term investments............. (12,494) -- --
Proceeds from sale of short-term investments.... 34,904 -- 500
Payments received on notes receivable........... 51 898 372
Advances made on notes receivable............... (21) (1,668) (650)
-------- -------- --------
Net cash used in investing activities..... (11,218) (37,657) (100,768)
Financing activities
Borrowings on notes payable to bank............. 3,000 -- 5,000
Proceeds from issuance of long-term debt........ -- 20,500 157,860
Principal payments on long-term debt............ (198) (1,120) (46,651)
Net proceeds from issuance of common stock...... 1,913 1,482 3,115
-------- -------- --------
Net cash provided by financing activities. 4,715 20,862 119,324
-------- -------- --------
Net increase (decrease) in cash................. (1,626) 1,078 (557)
Cash at beginning of year....................... 2,833 1,207 2,285
-------- -------- --------
Cash at end of year............................. $ 1,207 $ 2,285 $ 1,728
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
O'Reilly Automotive, Inc. ("the Company") is a specialty retailer and
supplier of automotive aftermarket parts, tools, supplies and accessories to
both the "do-it-yourself" customer and the professional installer throughout
Texas, Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana, Nebraska and
Illinois.
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.
Revenue Recognition
The Company recognizes sales upon shipment of products.
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 $246,402,000 as of December 31, 1997
and 1998, respectively.
Amounts Receivable from Vendors
Amounts receivable from vendors consist primarily of amounts due the Company
for rebates and other allowances.
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 property and equipment generally range from three to
40 years. Leasehold improvements are amortized over the terms of the underlying
leases. Maintenance and repairs are charged to expense as incurred. Upon
retirement or sale, the cost and accumulated depreciation are eliminated and
the gain or loss, if any, is included in the determination of net income as a
component of other income (expense). The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable.
F-8
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
1998, were $527,000 and $1,213,000, respectively. There were no interest costs
capitalized during 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 $3,156,000, $3,437,000 and $8,326,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
Financial Instrument
The Company utilizes interest rate swap agreements to manage interest rate
risk on its floating rate debt. During 1998, the Company entered into an
interest-rate swap agreement to modify the interest characteristics of its
outstanding long-term debt from a floating rate to a fixed rate basis. This
agreement involves the receipt of floating rate amounts in exchange for fixed
rate interest payments over the life of the agreement without an exchange of
the underlying principal amount. The differential to be paid or received is
accrued as interest rates change and recognized as an adjustment to interest
expense related to the debt. The related amount payable to or receivable from
the counterparty is included in other liabilities or assets. The fair value of
the swap agreement is not recognized in the consolidated financial statements
and approximates its carrying cost.
Preopening Costs
Costs associated with the opening of new stores, which consist primarily of
payroll and occupancy costs, are charged to operations as incurred.
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 11, 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.
F-9
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 7). The note receivable, amounting to $2,271,000 and
$2,203,000 at December 31, 1997 and 1998, 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.
New Accounting Pronouncements
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which established new rules for the reporting and display
of comprehensive income and its components. SFAS No. 130 had no impact on the
Company's financial statements.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" which established new
standards for the way public companies report information about operating
segments in annual and interim financial statements. The Company operates in a
single segment and accordingly, no segment disclosures are warranted for the
years ended December 31, 1996, 1997 and 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted in years beginning after June 15, 1999. The Company does
not anticipate that the adoption of SFAS No. 133 will have a significant effect
on the financial position or results of operations of the Company.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
F-10
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2--ACQUISITION
Effective January 31, 1998, the Company acquired 100% of the outstanding
capital stock of Hi-Lo Automotive, Inc. and its subsidiaries (Hi-Lo). Hi-Lo was
a specialty retailer supplying automotive aftermarket tools, supplies and
accessories principally throughout Texas and Louisiana. The purchase price was
approximately $49.3 million, including acquisition costs. The purchase price
was financed with long-term borrowings under the Company's credit facility. The
acquisition was accounted for using the purchase method of accounting and
accordingly, the results of operations of Hi-Lo have been included in the
Company's results of operations since the date of acquisition. The purchase
price was allocated to assets acquired and liabilities assumed based on their
estimated fair values. The excess of net assets acquired over the purchase
price, which totaled approximately $9.7 million, has been applied as a
reduction to the acquired property and equipment. Additional purchase
liabilities recorded included approximately $5,622,000 for severance and
certain costs associated with the closure and consolidation of certain acquired
stores. At December 31, 1998, approximately $2,005,000 of the consolidation
related costs remained on the accompanying balance sheet. The Company expects
to complete its consolidation of facilities during 1999.
The following unaudited pro forma financial information presents the
combined historical results of the Company and Hi-Lo as if the acquisition had
occurred at the beginning of 1997 and 1998, after giving effect to certain
adjustments, including the application of the excess of net assets acquired
over the purchase price to the acquired property and equipment and resulting
effect on depreciation, increased interest expense on long-term debt related to
the acquisition, and the related income tax effects.
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(In thousands,
except
per share data)
<S> <C> <C>
Product sales........................................ $ 554,719 $ 634,072
Net income........................................... $ 22,782 $ 29,443
Net income per share--assuming dilution.............. $ 1.07 $ 1.36
</TABLE>
The pro forma combined results are not necessarily indicative of the results
that would have occurred if the acquisition had been completed as of the
beginning of each of the years presented, nor are they necessarily indicative
of future consolidated results.
NOTE 3--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 1998, short-term investments consisted of
preferred equity securities.
NOTE 4--RELATED PARTIES
The Company leases certain land and buildings related to its O'Reilly Auto
Parts stores under six-year operating lease agreements with O'Reilly Investment
Company and O'Reilly Real Estate Company, partnerships in which certain
shareholders 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 7). Rent expense under these operating leases totaled
$1,729,000 in 1996, $2,122,000 in 1997 and $2,158,000 in 1998.
F-11
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5--NOTE PAYABLE TO BANK
The Company had available a short-term unsecured bank line of credit
providing for maximum borrowings of $5,000,000, all of which was outstanding at
December 31, 1998. There were no borrowings outstanding at December 31, 1997.
The line of credit bears interest at LIBOR plus 1.00% (6.63% at December 31,
1998). The line of credit was renewed and extended at January 28, 1999, and
expires on April 28, 1999.
NOTE 6--LONG-TERM DEBT
At December 31, 1998, the Company had available a credit facility providing
for maximum borrowings of $173 million. The facility is comprised of a
revolving credit facility of $125 million, and a term loan of $48 million. At
December 31, 1998, $121,401,000 of the revolving credit facility and $48
million of the term loan was outstanding. The credit facility, which bears
interest at LIBOR plus 0.50% (6.22% at December 31, 1998), expires in January
2003. In January 1999, the Company amended the credit facility to increase the
amount of available borrowings under the revolving credit facility by $35
million (see Note 16). In addition, the Company had outstanding borrowings
totaling $7,705,000 under its non-binding advised line of credit at December
31, 1998. This line of credit, which bears interest at 6.6%, was refinanced in
connection with the Company's amendment of its credit facility in January 1999.
At December 31, 1997, the Company had outstanding borrowings under its then
existing revolving credit facilities amounting to $22,500,000.
During 1998, the Company leased certain office equipment under capitalized
leases. Pursuant to the terms of the lease agreements, the Company has
committed to pay approximately $57,000 per month over three years. The present
value of the future minimum lease payments under these agreements totaled
$1,496,000 at December 31, 1998, which has been classified as long-term debt in
the accompanying consolidated financial statements.
Additionally, the Company has various unsecured notes payable to
individuals, amounting to $271,000 and $255,032, at December 31, 1997 and 1998,
respectively. The notes bear interest at rates ranging from 8% to 9% and are
due in monthly installments of approximately $2,600 including interest. The
notes mature in varying amounts between 1999 and 2000.
Indirect borrowings under letters of credit and guarantees of indebtedness
of others totaled $633,000 and $1,990,000 at December 31, 1997 and 1998,
respectively.
Principal maturities of long-term debt for each of the next five years
ending December 31 are as follows (amounts in thousands):
<TABLE>
<S> <C>
1999................................ $ 8,691
2000................................ 13,164
2001................................ 12,657
2002................................ 15,011
2003................................ 129,118
Thereafter.......................... 216
--------
$178,857
========
</TABLE>
F-12
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash paid by the Company for interest during the years ended December 31,
1996, 1997 and 1998 amounted to $35,000, $642,000 and $8,509,000, respectively.
NOTE 7--COMMITMENTS
Lease Commitments
The Company leases certain office space, property and equipment under long-
term, noncancelable operating leases. Future minimum rental payments, including
commitments of $2,250,200 per year through 2004 in connection with the related-
party leases described in Note 4, for each of the next five years ending
December 31 and in the aggregate are as follows (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999............................. $11,824
2000............................. 10,695
2001............................. 10,281
2002............................. 9,030
2003............................. 7,675
Thereafter....................... 34,000
-------
$83,505
=======
</TABLE>
A portion of the Company's retail stores and certain equipment are leased.
Most of these leases include renewal options and some include options to
purchase and provisions for percentage rent based on sales.
Rental expense amounted to $3,348,000, $4,136,000 and $13,862,000 for the
years ended December 31, 1996, 1997 and 1998, respectively.
Other Commitments
During October 1998, the Company announced that it had entered into a
definitive agreement to purchase substantially all of the assets of Hinojosa
Auto Parts ("Hinojosa") effective April 1, 1999. Hinojosa is a specialty
retailer of auto parts which operates 10 stores and a distribution center in
the Rio Grande Valley along the Texas/Mexico border. Under the terms of the
agreement, the Company will pay approximately $6 million in cash. The Company
will not assume any liabilities of Hinojosa.
The Company also had construction commitments which totaled approximately
$12.4 million at December 31, 1998.
NOTE 8--LEGAL PROCEEDINGS
The Company is currently involved in litigation as a result of a complaint
filed against Hi-Lo in May 1997. The plaintiff in this lawsuit sought to
certify a class action on behalf of persons or entities in the states of Texas,
Louisiana and California that have purchased a battery from Hi-Lo since May
1990. The complaint alleges that Hi-Lo offered and sold "old," "used" and "out
of warranty" batteries as if the batteries were new, resulting in claims for
violations of deceptive trade practices,
F-13
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
breach of contract, negligence, fraud, negligent misrepresentation and breach
of warranty. The plaintiff is seeking, on behalf of the class, an unspecified
amount of compensatory and punitive damages, as well as attorneys' fees and
pre- and post-judgment interest. On July 27, 1998, the Trial Court certified
this class. The Company appealed the decision to certify the class in the Court
of Appeals for the Ninth District of Texas. On February 25, 1999, the Court of
Appeals issued an opinion affirming the Trial Court's decision to certify the
class. The Company intends to contest this ruling by seeking a mandamus from
the Supreme Court of Texas. The Company believes that the accusations made in
this case are unfounded, and intends to defend this lawsuit vigorously.
Although it is difficult at this stage to determine the likely outcome of the
case, the Company believes that this lawsuit will not have a material adverse
effect on the Company's results of operations or financial position.
In addition, the Company and its subsidiaries are involved in various other
legal proceedings incidental to the conduct of its business. Although the
Company cannot ascertain the amount of liability that it may incur from any of
these matters, it does not currently believe that, in the aggregate, they will
have a material adverse effect on the consolidated financial position, results
of operations or cash flow of the Company.
NOTE 9--INTEREST RATE RISK MANAGEMENT
During 1998, the Company entered into an interest rate swap agreement to
effectively convert a portion of its floating rate long term debt to a fixed
rate basis, thereby reducing the impact of interest rate changes on future
income. Pursuant to this pay-fixed swap agreement, the Company agreed to
exchange, at specified intervals, the difference between the fixed and the
floating interest amounts calculated on the notional amount of the swap
agreement which totaled $100 million at December 31, 1998. The Company's fixed
interest rate under the swap agreement was 5.69% and the counterparty's
floating rate was 5.45% at December 31, 1998.
NOTE 10--EMPLOYEE BENEFIT PLANS
The Company sponsors a contributory profit sharing and savings plan that
covers substantially all employees who are 21 years of age with at least six
months of service. Employees may contribute up to 15% of their annual
compensation subject to Internal Revenue Code maximum limitations. The Company
has agreed to make matching contributions equal to 50% of the first 2% of each
employee's contribution and 25% of the next 2% of each employee's contribution.
Additional contributions to the plan may be made as determined annually by the
Board of Directors. After three years of service, Company contributions and
earnings thereon vest at the rate of 20% per year of service with the Company.
Company contributions charged to operations amounted to $1,229,000 in 1996,
$1,485,000 in 1997 and $1,818,000 in 1998. 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>
Year Market
Contributed Shares Value
----------- ------ --------
<S> <C> <C>
1996 19,786 $344,000
1997 20,913 415,000
1998 15,719 514,000
</TABLE>
F-14
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Profit-sharing contributions accrued at December 31, 1996, 1997 and 1998
were funded in the next year through issuance of shares of the Company's common
stock as follows:
<TABLE>
<CAPTION>
Year Market
Funded Shares Value
------ ------ ----------
<S> <C> <C>
1996 39,652 $ 684,000
1997 49,540 884,000
1998 36,193 1,070,000
</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,
1996, 1997 and 1998 amounted to $12,000.
Additionally, the Company has adopted a stock purchase plan under which
500,000 shares of common stock are reserved for future issuance. Under the
plan, substantially all employees and non-employee 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, 32,936 shares were
issued at an average price of $14.61 per share during 1996, 32,584 shares were
issued at an average price $17.49 per share during 1997 and 37,316 shares were
issued at an average price of $30.09 per share during 1998.
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, 556, 1,386 and 2,679 shares were issued during
1996, 1997 and 1998, respectively.
NOTE 11--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 3,000,000 shares of common stock is 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 the options 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 10 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>
Price per Number
Share of Shares
------------- ---------
<S> <C> <C>
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)
--------
</TABLE>
F-15
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Price per Number
Share of Shares
------------- ---------
<S> <C> <C>
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
Granted........................................ 24.75- 45.81 411,875
Exercised...................................... 8.75- 32.13 (119,300)
Canceled....................................... 8.75- 41.75 (34,350)
Forfeitures.................................... 8.75 (2,500)
---------
Outstanding at December 31, 1998................. $12.13-$45.81 1,591,925
=========
</TABLE>
Options to purchase 637,700, 521,700 and 799,550 shares of common stock were
exercisable at December 31, 1996, 1997 and 1998, respectively.
The Company also maintains a stock option plan for non-employee directors of
the Company under which 150,000 shares of common stock are reserved for future
issuance. All director stock options are granted at fair market value on the
date of grant and expire on the earlier of termination of service to the
Company as a director or seven years. Options granted under this plan become
exercisable six months from the date of grant. A summary of outstanding stock
options is as follows:
<TABLE>
<CAPTION>
Number
Price per Share of Shares
--------------- ---------
<S> <C> <C>
Outstanding at December 31, 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- 28.88 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
Granted....................................... 27.00 10,000
Exercised..................................... 8.75 (5,000)
Canceled...................................... -- --
-------
Outstanding at December 31, 1998................ $13.13-$27.00 35,000
=======
</TABLE>
All options under this plan were exercisable at December 31, 1996, 1997 and
1998.
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 non-employee 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 1996, 1997 and 1998, respectively: risk-free interest rates of
5.39%, 5.53% and 4.74%; volatility factors of the expected market price of the
Company's common stock of .200, .200 and .221; and weighted-average expected
F-16
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
life of the options of 3.5, 6.4 and 8.0 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, 1996, 1997
and 1998 were $4.79, $8.28, and $12.88, respectively. The weighted-average
remaining contract life at December 31, 1998 for all outstanding options under
the Company's stock option plans is 6.95 years. The weighted average exercise
price for all outstanding options under the Company's stock option plans was
$21.74 at December 31, 1998.
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:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(In thousands, except
per share data)
<S> <C> <C> <C>
Pro forma net income............................. $18,494 $22,432 $29,242
======= ======= =======
Pro forma basic net income per share............. $ 0.89 $ 1.07 $ 1.38
======= ======= =======
Pro forma net income per share--
assuming dilution............................... $ 0.88 $ 1.05 $ 1.35
======= ======= =======
</TABLE>
NOTE 12--INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted income
per common share:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1997 1998
------- ------- -------
(In thousands, except
per share data)
<S> <C> <C> <C>
Numerator (basic and diluted):
Net income........................................... $18,971 $23,143 $30,772
======= ======= =======
Denominator:
Denominator for basic income per common share--
Weighted-average shares............................. 20,864 21,043 21,238
Effect of employee stock options (Note 11)........... 168 234 364
------- ------- -------
Denominator for diluted income per common share
adjusted weighted-average shares and assumed
conversions......................................... 21,032 21,277 21,602
======= ======= =======
Basic net income per common share...................... $ 0.91 $ 1.10 $ 1.45
======= ======= =======
Net income per common share--assuming dilution ........ $ 0.90 $ 1.09 $ 1.42
======= ======= =======
</TABLE>
F-17
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--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:
<TABLE>
<CAPTION>
1997 1998
------ ------
(In
thousands)
<S> <C> <C>
Deferred tax assets:
Current:
Allowance for doubtful accounts....................... $ 138 $ 225
Vacation accrual...................................... 567 852
Inventory carrying value.............................. 636 --
Other accruals........................................ 83 3,031
------ ------
1,424 4,108
Noncurrent:
Property and equipment................................ -- 1,843
Other................................................. 158 1,335
------ ------
158 3,178
------ ------
Total deferred tax assets................................. 1,582 7,286
Deferred tax liabilities:
Current:
Inventory carrying value.............................. -- 1,270
------ ------
-- 1,270
Noncurrent:
Property and equipment................................ 2,273 --
Other accruals........................................ 30 --
------ ------
Total deferred tax liabilities............................ 2,303 1,270
------ ------
Net deferred tax assets (liabilities)............... $ (721) $6,016
====== ======
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -------
(In thousands)
<S> <C> <C> <C>
1996:
Federal........................................ $ 8,502 $ 1,316 $ 9,818
State.......................................... 1,077 167 1,244
------- ------- -------
$ 9,579 $ 1,483 $11,062
======= ======= =======
1997:
Federal........................................ $13,562 $ (915) $12,647
State.......................................... 1,893 (127) 1,766
------- ------- -------
$15,455 $(1,042) $14,413
======= ======= =======
1998:
Federal........................................ $10,386 $ 6,852 $17,238
State.......................................... 1,156 777 1,933
------- ------- -------
$11,542 $ 7,629 $19,171
======= ======= =======
</TABLE>
F-18
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the provision for income taxes to the amounts computed
at the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate........... $10,512 $13,145 $17,480
State income taxes, net of federal tax benefit... 809 1,148 1,256
Other items, net................................. (259) 120 435
------- ------- -------
$11,062 $14,413 $19,171
======= ======= =======
</TABLE>
The tax benefit associated with the exercise of non-qualified stock options
has been reflected as additional paid-in capital in the accompanying
consolidated financial statements.
During the years ended December 31, 1996, 1997 and 1998, cash paid by the
Company for income taxes amounted to $9,015,000, $12,168,000 and $16,229,000,
respectively.
NOTE 14--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.
NOTE 15--QUARTERLY FINANCIAL DATA--UNAUDITED
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except per share
data)
<S> <C> <C> <C> <C>
Year ended December 31, 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................ 0.24 0.29 0.31 0.26
Net income per share--assuming dilution... 0.24 0.29 0.31 0.25
Year ended December 31, 1998
Product sales............................. $118,269 $165,242 $172,784 $160,007
Gross profit.............................. 50,669 66,201 69,345 71,648
Operating income.......................... 10,602 13,745 15,435 17,119
Net income................................ 5,819 7,672 8,361 8,920
Basic net income per share................ 0.28 0.36 0.39 0.42
Net income per share--assuming dilution... 0.27 0.36 0.39 0.41
</TABLE>
F-19
<PAGE>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
NOTE 16--SUBSEQUENT EVENTS
Effective January 4, 1999, the Company entered into a Master Lease Agreement
with O'Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the
Company) related to the sale and leaseback of certain properties. The
transaction closed on January 4, 1999 with a purchase price of approximately
$5.5 million. The lease calls for an initial term of 15 years with two five-
year renewal options.
In January 1999, the Company amended its syndicated credit facility. Under
the terms of the amendment, the commitment under the revolving credit facility
was increased to $160,000,000 from $125,000,000. This $35,000,000 increase
terminates July 31, 1999 or upon the occurrence of a "capital markets event"
(as defined). The Company believes that the completion of the offering
discussed below will constitute a capital markets event. Advances under this
amendment bear interest at the rates provided for in the original credit
agreement.
On March 5, 1999, the Company filed a registration statement with the
Securities and Exchange Commission for a secondary offering of 4,140,000 shares
of common stock, 3,000,000 of which are to be offered by the Company. The net
proceeds from this offering will be used to repay certain of the outstanding
indebtedness of the Company under its credit facility.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
O'REILLY AUTOMOTIVE, INC.
Date: March 12, 1999 /s/ James R. Batten
------------------------------
James R. Batten
Vice-President of Finance, Chief
Financial Officer and Treasurer
<PAGE>
Exhibit 23.1
------------
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Selected Consolidated
Financial Data" in this Current Report (Form 8-K) dated March 12, 1999 filed
with the Securities and Exchange Commission.
We also consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-73377, Form S-8 No. 33-61632, Form S-8 No. 33-73892, and Form
S-8 No. 33-91022) of O'Reilly Automotive, Inc. of our report dated March 2, 1999
with respect to the consolidated financial statements of O'Reilly Automotive,
Inc. included in this Current Report (Form 8-K) dated March 12, 1999 filed with
the Securities and Exchange Commission.
Ernst & Young LLP
Kansas City, Missouri
March 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Company's 8-K and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,728
<SECURITIES> 500
<RECEIVABLES> 54,853
<ALLOWANCES> 613
<INVENTORY> 246,012
<CURRENT-ASSETS> 310,882
<PP&E> 210,207
<DEPRECIATION> 39,256
<TOTAL-ASSETS> 493,288
<CURRENT-LIABILITIES> 102,519
<BONDS> 0
0
0
<COMMON> 213
<OTHER-SE> 218,181
<TOTAL-LIABILITY-AND-EQUITY> 493,288
<SALES> 616,302
<TOTAL-REVENUES> 617,470
<CGS> 358,439
<TOTAL-COSTS> 358,439
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,126
<INCOME-PRETAX> 49,943
<INCOME-TAX> 19,171
<INCOME-CONTINUING> 30,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,772
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.42
</TABLE>
