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, 19971998
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.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,here, 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.
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At February 27, 1998,26, 1999, an aggregate of 21,149,42921,376,421 shares of the common stock
of the registrant werewas 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$939,226,498 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,here, portions of the registrant's documents specified below
are incorporated hereinhere by reference:
Document Part-Form 10-K
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Portions of the Annual Shareholders'
Report for the Year Ended December 31, 19971998 Parts I, II and IV
Proxy Statement for 19981999 Annual Meeting of
StockholdersShareholders (to be filed pursuant to
Regulation 14A within 120 days of the end of Part III
registrant's most recently completed fiscal
year) Part III
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'sour actual results and the timing of certain eventsevens could
differ materially from those discussed herein.in this document. 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 hereinhere by
reference) and thosethe risk factors discussed in Exhibit 99.1 hereto.
PART I
ITEM 1 BUSINESS
Generalbelow. Unless otherwise
indicated, "we," "us," "our" and similar terms, as well as references to
the "Company" and "O"Reilly" refer to O'Reilly Automotive, Inc. ("O'Reilly" orand its
subsidiaries.
PART I
Item 1. Business
O'Reilly Automotive, Inc. is one of the "Company") is alargest specialty retailer and supplierretailers of
automotive aftermarket parts, tools, supplies, equipment and accessories ("Automotive Products")in
the United States, selling our products to both "do-it-yourself"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 (atinstallers. At December 31, 1997) within the states of1998 we operated 491
stores in Texas, Missouri, Oklahoma, Kansas, Iowa, Arkansas, Kansas, Oklahoma,Louisiana,
Nebraska and Iowa. See "Growth and Expansion Strategies." O'ReillyIllinois. Our stores carry an extensive product line
consisting of (i)of:
o new and remanufactured automotive hard parts, such as alternators,
starters, fuel pumps, water pumps, and brake shoes and pads, (ii)chassis
parts and engine parts;
o maintenance items, such as oil, antifreeze, fluids, engine additives and
appearance products, (iii)products;
o accessories, such as floor mats and seat covers,covers; and
(iv)o a complete line of auto bodyautobody paint and related materials, automotive
tools and professional service equipment.
The Company offers machining services
through its O'Reilly stores, but doesWe do not sell tires or perform automotive repairs or installations.
Approximately 97% of the Company's 1997 product salesWe 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(one of our current director of the Company)directors), and initially operated
from a single store in Springfield, Missouri, with 12 employees selling
primarily to the Professional Installer portion of the market.Missouri. The 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 Companyfamily 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'scompany since our inception.
Our goal is to continue its pattern ofto achieve growth in sales and profitability
by capitalizing on its role asour competitive advantages and executing our growth and
expansion strategies.
See "Risk Factors" beginning on page 11 for a leading specialty retailerdescription of certain
risks relevant to an investment in our common stock. These risk factors
include, among others, risks related to competition in the automotive
aftermarket business, our growth strategy, our acquisition strategy, our
sensitivity to regional economic and supplier of Automotive Products throughout its markets. Theweather conditions, our dependence
upon key elements ofand other personnel, the multifaceted business strategy developedsignificant voting control held by our
principal shareholders and the CompanyYear 2000 issue.
Competitive Advantages
Proven Ability to achieve this goal are
discussed below.
Operating StrategiesExecute Dual Market Strategy. The Company believes that because it aggressively
pursuesWe have an established
track record of serving both the DIY customers and the Professional Installer portionsprofessional installers. We
believe our ability to execute a dual market strategy is a competitive
advantage which enables us to:
o target a larger base of theconsumers of automotive aftermarket through its O'Reilly store network, the Company can successfully
compete not onlyparts;
o capitalize on our existing retail and distribution infrastructure;
o profitably operate both in large metropolitan markets but also inand less densely populated
areas. Ingeographic areas which typically attract fewer competitors; and
o enhance service levels offered to our DIY customers by offering a
broad selection of stock keeping units ("SKUs") and extensive product
knowledge required by professional installers.
We have been committed to a dual market strategy for over 20 years and
from the mid-1980's through 1997 the Company derived approximately one-half50% of our product
sales from our DIY customers and approximately 50% from our professional
installer customers. As a result of our acquisition of Hi/LO, which derived
approximately 65% of its O'Reilly store network sales byfrom DIY customers and approximately 35%
from professional installers prior to the acquisition, for 1998 we derived
approximately 57% of our product sales from our DIY customers and
approximately 43% from our professional installer customers. As a result of
our historical success in executing our dual market strategy and our over
70 full-time sales representatives dedicated solely to calling upon and
selling to the DIY marketprofessional installer, we believe we will increase the
former Hi/LO stores' sales to professional installers 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
Page 2
(either in-store or at its distribution centers)have a
broader selection of
stock-keeping units ("SKU's"),competitive advantage over our retail competitors who have only recently
entered 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 partbegun focusing 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.professional installer market.
Superior Customer Service. The Company's number one priority is customer
satisfaction. The Company seeksWe seek to attract new DIY and Professional Installerprofessional
installer customers and to retain existing customers by conducting a varietyoffering superior
customer service, the key elements of advertising and promotional programs and by offering (i)which include:
o superior in-store service through highly-motivated, technically-proficient technically
proficient store personnel ("Professional Parts PeoplePeople") using
advanced point-of-sale systems, (ii)systems;
o an extensive selection of SKU's stockedproducts;
o attractive stores in convenient locations; and
o competitive pricing, with a low price guarantee.
Technically Proficient Professional Parts People. Our highly
proficient Professional Parts People provide us with a significant
competitive advantage, particularly over less specialized retail operators.
We require our Professional Parts People to undergo extensive and ongoing
training and to be technically knowledgeable, particularly with respect to
hard parts, in order to better serve the technically-oriented professional
installers with whom they interact on a daily basis. Such technical
proficiency also enhances the customer service we provide to our DIY
customers, who appreciate the expert assistance provided by our
Professional Parts People.
Strategic Distribution Systems. We believe that the geographic
concentration of our store network in nine contiguous states (Missouri,
Iowa, Nebraska, Kansas, Oklahoma, Texas, Louisiana, Arkansas and Illinois)
and the strategic locations of our four distribution centers enable us to
maintain optimum inventory levels throughout our store network. In
addition, our inventory management and distribution systems electronically
link each store, (iii)of our stores to a distribution center, providing for efficient
inventory control and management. Our distribution system provides each of
our stores with 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 over 100,000 SKUs, many of
which are hard to find items not typically stocked by other parts
retailers. We believe the Company's databaseavailability 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.
Page 3
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 commitmentproducts is a
key competitive advantage in satisfying customer demand and generating
repeat business.
Experienced Management Team. Our management team has a demonstrated
ability to providing its
customerssuccessfully execute our business plan, including the
identification and integration of strategic acquisitions. We have
experienced 20 consecutive quarters of year-to-year record sales and
earnings growth. We have a strong senior management team comprised of 37
professionals who average 20 years of experience with the Automotive Products requested, the Company has instituted a
Right Part, Right Price, Right Now(R) policy. Under this policy, if anyO'Reilly. In
addition, our 50 district managers average over 10 years 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.
Consistentexperience 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.us.
Growth and Expansion Strategies
AcceleratedAggressively Open New Store Openings. The Company's abilityStores. We intend to continue to aggressively
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 storesorder to achieve greater penetration in existing markets
and to expand into new, contiguous markets. On January 30, 1998, the Company completedWe plan to open approximately
80 stores in 1999 (including a merger with Hi-Lo Automotive,
Inc.net of seven stores to be acquired from
Hinojosa Auto Parts in April 1999) and its subsidiaries ("Hi/LO") by acquiring 100%approximately 100 stores in 2000.
Nearly all of the outstanding capital
stock. Hi/LO issites for our proposed 1999 store openings and a specialty retailer and supplier of Automotive Products
headquartered in Houston, Texas. Hi/LO is now a wholly-owned subsidiarymajority
of the Company, with 189sites for our proposed 2000 store openings have been identified. In
selecting sites for new stores, locatedwe seek to strategically locate store sites
in Texas (165), Louisiana (17) and California
(7), and a 375,000 square foot distribution center locatedclusters within geographic areas 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 acquisitionachieve economies of Hi/LO,scale
in areas such as management, advertising 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.
Page 4
distribution.
Until 1986, the Company'sour expansion was targeted to markets with populations of
less than 100,000. The CompanyWe 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 4050 (net) stores
opened in 1997, 101998 (other than the Hi/LO stores), 15 are located in Nebraska,Iowa, 15 in
Oklahoma, 10 in Oklahoma, 8Texas, 4 in Kansas, 7 in IowaMissouri and the remainder are located in
MissouriKansas, Nebraska, Illinois and Arkansas. While the Company haswe have faced, and expectsexpect to
continue to face, more aggressive competition in itsthe more densely populated
markets, the Company believeswe believe that it
haswe have competed effectively, and that it iswe are well
positioned to continue to compete effectively, in such markets and achieve
itsour goal of continued sales and profit growth within these markets. The CompanyWe also
believesbelieve that because of its Dual
Market Strategy, the Company isour dual market strategy, we are better able to
operate stores in less densely populated areas within itsour 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 expectswe expect
to continue to open new stores in less densely populated market areas.
To date, the Company haswe have 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. NewWe typically open
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'sour distribution system in order
to achieve economies of scale in management, advertising, and distribution
costs. Other key factors considered by the Companywe consider 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 Companywe generally seeksseek 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'sour growth strategy. To achieve improved sales and
profitability at existing O'Reilly stores, the Companywe continually strivesstrive to improve
upon the service provided to itsour customers. The Company believesWe believe 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)professional installer), resulting from superior
customer service that generates increased sales and profitability.
Selectively Pursue Strategic Acquisitions. Although the automotive
aftermarket industry is still highly fragmented, we believe the ability of
national and regional specialty retail chains, such as O'Reilly, to operate
more efficiently than smaller independent operators or mass merchandisers
will result in continued industry consolidation. Thus, we intend to
selectively pursue acquisition targets that will strengthen our position as
a leading automotive products retailer.
In October 1998, we agreed to purchase substantially all of the assets
of Hinojosa Auto Parts for approximately $6 million. Hinojosa is a
specialty retailer and supplier of automotive aftermarket products with a
chain of 10 stores and a 48,000 square foot distribution center operating
in the Rio Grande Valley along the Texas/Mexico border. We expect the
acquisition of Hinojosa to close in April 1999.
Effective January 31, 1998, we acquired Hi/LO, a specialty retailer
and supplier of automotive aftermarket products headquartered in Houston,
Texas. Following the acquisition, we sold seven Hi/LO stores located in
California. Of the 182 stores remaining after such sale, 165 are located in
Texas and 17 are located in Louisiana. Through the Hi/LO acquisition, we
also acquired a 425,000 square foot distribution center located in Houston.
The Hi/LO operations are contiguous to our other operations, thereby
creating a natural geographic extension of our business. In addition, Hi/LO
was experienced in serving professional installers, deriving approximately
35% of its revenues from such customers. 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, which we assumed.
We expect to continue realizing the benefits of the nearly completed
integration of the 182 net stores we acquired through the acquisition of
Hi/LO. We have updated the products offered at the Hi/LO stores with a
product mix consistent with our existing stores, converted the Hi/LO stores
to our MIS systems and, in some cases, renovated or relocated Hi/LO stores.
Furthermore, we intend to continue to pursue business in the professional
installer market in Hi/LO's service areas, and benefit from increased
leverage in purchasing and reduced overhead expenses.
Continually Enhance Store Design and Location. The Company'sOur current prototype
store design completed in 1994, features several enhancements designed to increase product
sales, customer service and operating efficiencies, which generally includessuch as 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 itsprofessional
installers, each designed to increase product sales and operating
efficiencies and enhance customer service. We continually update the
location and condition of our store network through systematic renovation
and relocation of our existing O'Reilly
stores whichto conform with the Company'sour prototype store
design. In 1997, the
Company1998, we 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
Page 5
distribution system results in lower inventory carrying costs, improved in-stock
positions at the O'Reilly18 stores, and superior inventory control and management.
Moreover, the Company believesin 1999 plan to
renovate or relocate approximately 19 stores. We believe that its expanding network of distribution
centers allows itour ability
to efficiently service existing O'Reilly stores, as well as
new stores planned for openingconsistently achieve significant growth in contiguous market areas. The Company's
distribution center expansion strategy also complements its newsame store opening
strategy by supporting newly established clusters of stores locatedproduct sales is
due in the
regions surrounding each distribution center.
Store Operations
Store Layout. Although the Company has no present intentionpart to open new
Level 2 Stores, the O'Reillyour commitment to maintaining an attractive store network
which is composed generally of three store
formats consisting of the Level 2 Store, the Level 1 Storestrategically located to best serve our customers.
Products and the Master
Inventory Store which, as of December 31, 1997, are categorized based on the
number of in-stock SKU's as follows:
Approximate
Number of Range of Number of
Store Format Stores Square Footage In-Stock SKUs
--------------------------- ------ ----------------- ---------------
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
---------
259
=========
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'ReillyPurchasing
Our stores offer the DIY and the Professional Installer customerprofessional installer customers a wide
selection of nationally recognized brand name and private label SKU'sproducts for domestic and
imported automobiles, vans and trucks. New and remanufacturedWe do not sell tires or perform
automotive hard parts,repairs or installations. Our merchandise generally consists of
nationally recognized, well advertised, name brand products such as engineAC
Delco, Moog, Wagner, Gates Rubber, Federal Mogul, Monroe, Prestone, Quaker
State, Pennzoil, Castrol, Valvoline, STP, Armor All and transmission parts, alternators,
starters, water pumps,Turtle Wax. In
addition to name brand products, our stores carry a wide variety of
high-quality private label products under the Parts Master(R) name brand
and brake shoesour O'Reilly Auto Parts(R), SuperStart(R), BrakeBest(R), Ultima(R) and
pads, haveOmnispark(R) proprietary name brands. Because most of our private label
products are produced by nationally recognized manufacturers in accordance
with our specifications, we believe that the private label products are
generally of equal or, in some cases, better quality than comparable name
brand products, a characteristic which is important to our professional
installer clientele. We further believe that the private label products are
packaged attractively to promote customer interest and are generally priced
below comparable name brand products carried in our stores.
We purchase automotive products from approximately 400 vendors, the
five largest of which accounted for approximately 30% of our total
purchases in 1998, after giving effect to the consolidation of several of
our vendors which occurred towards the end of the year. After such
consolidation, our largest vendor in 1998 accounted for approximately 13%
of our total purchases and no other vendor accounted for more than 5% of
such purchases. We have no long-term contractual purchase commitments with
any of our vendors, nor have we experienced difficulty in obtaining
satisfactory alternative sources of supply for automotive parts. We believe
that alternative supply sources exist at substantially similar costs, for
substantially all automotive products that we sell. It is our policy to
take advantage of early payment and seasonal purchasing discounts offered
by our vendors, and to utilize extended dating terms available from vendors
due to volume purchasing. We consider our relationships with our suppliers
to be good.
Store Network
Store Locations. As a majorityresult of our dual market strategy, we are able
to profitably operate in both large, densely populated markets and less
densely populated areas which would not otherwise support a national or
regional chain selling to just one portion of the automotive aftermarket.
The following table sets forth the geographic distribution of our stores:
Number
State of Stores
Texas 174
Missouri 113
Oklahoma 87
Kansas 47
Iowa 22
Arkansas 17
Louisiana 17
Nebraska 13
Illinois 1
==============
Total 491
==============
Our stores on average carry approximately 23,000 SKUs and average
approximately 6,500 total sales. An O'Reilly storesquare feet in size. Our stores are served
primarily by the nearest distribution center, but also carries an extensivehave access to the
broader selection of maintenance items, such as oil, antifreeze, fluids, engine additives, appearance
products,inventory available at one of our 49 Master Inventory
Stores, which on average carry approximately 40,000 SKUs and accessories, such as floor mats and seat covers, and a complete
line of auto body paint and related materials, automotive toolsare
approximately 10,000 square feet in size. Master Inventory Stores, in
addition to serving DIY and professional service equipment. Maintenance items and accessories have accounted forinstaller customers in their
markets, also provide our other stores within their areas access to a
greater selection of SKUs on a same day basis.
We believe that our 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 of the remaining sales. The Company operates machine shops in 9 regional locations,
7 of whichour stores are
located at an O'Reilly store. There are two free-standing machine
shops, one located in Springfield, Missouri,buildings situated on or near major traffic thoroughfares,
and the other in Tulsa, Oklahoma.
The O'Reilly machine shops perform engine machining services (such as block
boring, head resurfacing,offer ample parking 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.easy customer access.
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 utilizesLayout. We utilize a computer-assisted "plan-o-grammed" store
layout system to provide a 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 aislecustomer. 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.
Page 6
Store Automation. To enhance store level operations and customer
service, the Company has installed advanced point-of-salewe use IBM AS/400 computer terminals which are
generally located on the hard parts counters.systems in all of our stores. These
point-of-sale terminalssystems are linked with the IBM AS/400 computers located in each of the Company'sour
distribution centers and utilizecenters. Our point-of-sale terminals use bar code scanning
technology to price our merchandise in sales transactions. In addition, the point-of-sale terminalsand provide immediate access to the Company'sour
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 capturesour store
automation systems capture sales information which assists in store
management, strategic planning, inventory control and distribution
effectiveness.efficiency.
New Store PersonnelSite Selection. In selecting sites for new stores, we seek
to strategically locate store sites in clusters within geographic areas in
order to achieve economies of scale in management, advertising and
Training.distribution. Other key factors we consider in the site selection process
include:
o population density and growth patterns;
o age and per capita income;
o vehicle traffic counts;
o the number and type of existing automotive repair facilities; and
o the number of 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, we generally seek
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. After opening this initial cluster of new stores, we
seek to begin penetrating the less densely populated surrounding areas.
This strategy enables us to achieve additional distribution and advertising
efficiencies in each market.
Distribution System
The Company believesfollowing table sets forth the distribution centers we currently
operate:
Number of
Location Square Footage Stores Served
Houston, TX 424,823 183
Springfield, MO 254,720 118
Oklahoma City, OK 238,520 104
Kansas City, MO 128,064 86
In addition, adjacent to the Springfield, Missouri distribution
center, we operate a 36,000 square foot bulk merchandise warehouse used for
the distribution of bulk products such as motor oil, antifreeze, batteries,
lubricants and other fast moving bulk products, and an 18,000 square foot
facility where goods to be returned are stored.
Our distribution centers are equipped with highly automated conveyor
systems which expedite the movement of our 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 of our stores. In addition to the bar code system
employed in our stores, we have established a satellite-based data
interchange system among those stores in which high-speed data transmission
technology is not readily available, the distribution center which services
such stores and our corporate headquarters.
We believe that technical
proficiency onour distribution system assists us in lowering our
inventory-carrying costs, improving our store in-stock positions, and
controlling and managing our inventory. Moreover, we believe that our
expanding network of distribution centers allows us to more efficiently
service existing stores, as well as new stores planned for opening in
contiguous market areas. Our distribution center expansion strategy also
complements our new store opening strategy by supporting newly established
clusters of stores located in the regions surrounding each distribution
center. As part of our continuing efforts to enhance our distribution
network, in 1999 we plan to:
o open a distribution center in Des Moines, Iowa;
o acquire a distribution center in McAllen, Texas as a result of the
planned Hinojosa acquisition;
o increase the service radius of the distribution center in Oklahoma City,
Oklahoma which we recently expanded; and
o implement a new warehouse management system in certain distribution
centers which will enhance the efficiency of our distribution
network.
Marketing
Marketing to the DIY Customer. We aggressively promote sales to DIY
customers through an extensive advertising program which includes direct
mail and newspaper, radio and television advertising in selected markets.
We believe that our advertising and promotional activities have resulted in
significant name recognition in each of our market areas. Newspaper and
radio advertisements are generally directed towards specific product and
price promotions, frequently in connection with specific sale events and
promotions. To promote sales specialist is essential to meetcar enthusiasts, who we believe on an
individual basis spend more on automotive products than the needspublic
generally, we sponsor over 35 motorsports shows at over 50 racetracks in
nine states, including the O'Reilly Auto Parts Mid-West Outlaw Mini-Sprints
and the O'Reilly Oklahoma Legends Dirt racing series, as well as three
National Hotrod Racing Association races in Houston and Dallas. We have
found that the more progressive marketing concepts utilized in the DIY
portion of its customers, particularlyour business can also be applied to increase sales to our
professional installer customers.
Marketing to the Professional Installer,Installer. We have over 70 full-time
O'Reilly sales representatives strategically located in the more densely
populated market areas that we serve, and each is dedicated solely to
calling upon and selling to the professional installer. Moreover, each
district manager and store manager throughout our store network calls upon
existing and potential new professional installer customers on a regular
basis. Our marketing strategy with respect to professional installers
emphasizes our ability to offer:
o prompt delivery using small trucks or vans operated by most of our
stores;
o a separate counter in most of our stores dedicated exclusively to
serving professional installers;
o trade credit for qualified professional installers;
o broad inventory of merchandise and competitive pricing;
o a professional installer computer system that connects directly to our
inventory system; and
o seminars concerning topics of interest to professional installers,
such as technical updates, safety and general business management.
Marketing to the technical proficiencyIndependently Owned Parts Store. Along with the
operation 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 operatorsdistribution centers and the less specialized mass merchandisers.
The Company's training function is managed by a full time vice-presidentdistribution of marketing and training who, together with his staff, is headquartered in
Springfield, Missouri. There currentlyAutomotive
Products to the O'Reilly stores, Ozark also sells Automotive Products to
independently owned parts stores whose retail stores are regional trainersgenerally 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 atareas not serviced by an O'Reilly store. All new counter people are requiredWe generally do not compete
with any independently owned parts store to successfully completewhich we sell Automotive
Products, but have, 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
six-month
basic automotive systems training coursestaff of five. Of the approximately 60 independently owned parts stores
currently purchasing Automotive Products from Ozark, 56 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
are then enrolled inoperational 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 six-month
advanced automotive systems course for ASE certification. Asnon-profit buying group
consisting of 41 members 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.
Each1998, including O'Reilly,
store participatesengaged in the Company'sdistribution or sale of Automotive Products. Additionally,
we provide advertising and promotional assistance to Auto Value(R) stores
purchasing Automotive Products from Ozark, as well as marketing and sales
specialist training
program that is conductedsupport. In return for a commitment to purchase Automotive Products from
Ozark, we offer assistance to an Auto Value(R) independently owned parts
store by the operations training manager. Under this
program, selected team members complete two daysproviding loan guarantees and financing secured by inventory,
furniture and fixtures, making available computer software for inventory
control and performing certain accounting and bookkeeping functions.
Management Structure
Each 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 storeour stores is staffed with a store manager and an assistant
manager, in addition to the counter sales personsparts specialists and support staff required to
meet the specific needs of each store. There are currently 31Each of our 50 district managers
each of whom has
general supervisory responsibility for an average of eight
O'Reilly10 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 Companyour 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 providesWe provide financial incentives to itsour district managers, store
managers, assistant managers and sales specialists through an incentive
compensation program. Under the Company'sour 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 believesWe believe that itsour incentive compensation program
significantly increases the motivation and overall performance of itsour
Professional Parts People and Page 7
the Company'sour ability to attract and retain qualified
management and other personnel.
Most of the Company'sour current senior management, district managers and store
managers were promoted to their positions from within the Company. Most members ofOur
senior management have at leastteam averages 20 years of experience with the Company and
district managers and store managers have an average length of service with the Company of
approximately eight yearsover 10 years.
Professional Parts People
We believe our highly trained team of Professional Parts People is
essential in providing superior service both to DIY and six years,
respectively.
Marketingprofessional
installer customers. Each of our Professional Parts People is required to
be technically proficient in the workings and Products
Marketingapplication of automotive
products due to the significant portion of our business represented by the
professional installer. In addition, we have found that the typical DIY
customer often seeks assistance from sales persons, particularly in
connection with the purchase of hard parts. We believe that the ability of
our Professional Installer. Throughout its history, the
Company has been a seller of Automotive ProductsParts People to provide such assistance to the Professional Installer.DIY
customer creates a favorable impression during a customer's visit to our
store and is a significant factor in generating repeat DIY business.
We screen prospective employees, whom we refer to as team members, to
identify highly motivated individuals either with experience in automotive
parts or repairs, or an aptitude for automotive knowledge. Each person who
becomes a team member first participates in an intensive two-day
orientation program designed to introduce the team member to our culture
and his or her job duties before being assigned specific job
responsibilities. The Company considerssuccessful 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 of one of our stores. 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 certification by the National
Institute for Automotive Service Excellence ("ASE"), which administers
national exams for various automotive specialties and requires ASE
certified specialists to take recertification exams every five years.
Each of our stores participates in our sales specialist training
program. Under this portionprogram, selected team members complete two days of
itsextensive 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.
Customer Service
We seek to beprovide our customers with an integralefficient and pleasant
in-store experience by maintaining attractive stores in convenient
locations with a wide selection of automotive products. We believe that the
satisfaction of DIY and professional installer customers is substantially
dependent upon our ability to provide, in a timely fashion, the specific
automotive product requested. Accordingly, each O'Reilly store carries a
broad selection of automotive products designed to cover a wide range of
vehicle specifications. We continuously refine the inventory levels carried
in our stores, based in large part of its
entire business strategyon the sales movement shown by our
computerized inventory control system 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 maintenanceon management's assessment of the
Company's Professional Installer business. There are 40 full time O'Reilly sales
representatives strategically locatedchanges and trends 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 believesmarketplace.
Pricing
We believe that a competitive pricing strategypolicy is essential within all
product categories in order to compete successfully. The
Company'sProduct pricing is
generally established by senior management, with input from store
management, in a manner designed to meet product prices charged by the Company'spricing policies of competitors in the
market. To assure competitive pricing,market area served by each store. Most automotive products that we sell are
priced at discounts to the Company has
established its Low Price Guarantee(R) policy under whichmanufacturer suggested prices, and additional
savings are offered through volume discounts and special promotional
pricing. Consistent with our low price guarantee, each O'Reilly store,
at the request of a customer,our stores will
match any verifiable price on any in-stock product of the same or
comparable quality. Most Automotive Products soldquality offered 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
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.our competitors.
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 competesWe compete in both the DIY and Professional Installerprofessional 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) includeaftermarket. We compete primarily with:
o national and regional retail automotive parts chains such(such as
AutoZone, Inc., Advance Auto Parts America (formerly known as Western Auto) and The Pep Boys,Boys-Manny, Moe and
Jack, Inc.);
o independently owned parts stores;
o wholesalers or jobber stores (some of which are associated with
national autoautomotive 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), CarquestNAPA
and Parts Plus. AutoZone
entered into certain of the Company's Professional Installer markets in 1997.
The Company competesCarQuest);
o automobile dealers; and
o mass merchandisers that carry automotive replacement parts,
maintenance items and accessories (such as Wal-Mart Stores, Inc.).
We compete on the basis of customer service, which includes
merchandise selection and availability, price, helpfulness of store
personnel and store layout and location.
The Company believes that its principal
Page 9
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.
EmployeesTeam Members
As of December 31, 1997, the Company1998, we had 3,9456,330 full-time team members and 1,547
part-time team members, of whom 2,9736,081 were employed at the O'Reillyour stores, 5951,244
were employed at theour distribution centers and 377552 were employed at theour
corporate and administrative headquarters. The Company'sOur team members are not subject
to a collective bargaining agreement. The Company considers itsWe consider our relations with itsour
team members to be excellent, and strivesstrive to promote good employee relations with our
team members through various programs designed for such purposes.
Servicemarks and Trademarks
The Company hasWe have 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)Omnispark(R) and
Omnispark(R)First Call(R). Further, the Company iswe are 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 believesAssociates in connection with our marketing program. We believe that itsour
business is not otherwise dependent upon any patent, trademark, servicemark
or copyright.
RegulationRegulations
Although subject to various laws and governmental regulations relating
to itsour business, including those related to the environment, the Company doeswe do not
believe that compliance with such laws and regulations has a material
adverse effect on itsour operations. Further, the Company iswe are unaware of any failure to
comply with any such laws and regulations which could have a material
adverse effect on itsour operations. No assurance can be given, however, that
significant expenses couldwould not be incurred by the Companyus to comply with any such
law or regulation in the future.
Page 10
ITEM 2 PROPERTIES
- ------------------------Risk Factors
Some of the information in this Form 10-K contains and future reports
and press releases and other public information may contain forward-looking
statements that involve substantial risks and uncertainties. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," and "continue" or similar
words. These "forward-looking statements" are made in reliance upon the
safe harbor provisions of the Private Litigation Reform Act of 1995 (See
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934.) You should read statements that contain these words
carefully because they: (1) discuss our future expectations; (2) contain
projections of our future results of operations or of our financial
condition; or (3) state other "forward-looking" information. We believe it
is important to communicate our expectations to our investors. However,
there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this Form 10-K, provide
examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the occurrence of the
events described in these risk factors and elsewhere in this Form 10-K
could have a material adverse effect on our business, operating results and
financial condition.
The Automotive Aftermarket Business is Highly Competitive
Both the DIY and professional installer portions of our business are
highly competitive, particularly in the more densely populated areas that
we serve. Some of our competitors are larger than we are and have greater
financial resources. In addition, some of our competitors are smaller than
we are overall but have a greater presence than we do in a particular
market. For a list of our principal competitors, see the
"Business--Competition" section of Item 1 of this Form 10-K.
We Cannot Assure Future Growth
We believe that our ability to open additional stores at an
accelerated rate will be a significant factor in achieving our growth
objectives for the future. Failure to achieve our growth objectives may
negatively impact the trading price of our common stock. Our ability to
accomplish our growth objectives is dependent, in part, on matters beyond
our 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. We cannot be sure
that our growth plans for 1999 and beyond will be achieved. For a
discussion of our growth strategies, see the "Business--Growth and
Expansion Strategies" section of Item 1 of this Form 10-K.
Acquisitions May Not Lead to Expected Growth
We acquired Hi/LO in January 1998 and plan to acquire Hinojosa in
April 1999. We expect to continue to acquire companies as an element of our
growth strategy. Acquisitions involve certain risks that could cause our
actual growth to differ from our expectations. For example: (1) we may not
be able to continue to identify suitable acquisition candidates or to
acquire additional companies at favorable prices or on other favorable
terms; (2) our management's attention may be distracted; (3) we may fail to
retain key acquired personnel; (4) we may assume unanticipated legal
liabilities and other problems; and (5) we may not be able to successfully
integrate the operations (accounting and billing functions, for example) of
businesses we acquire to realize economic, operational and other benefits.
Sensitivity to Regional Economic and Weather Conditions
All of our stores are located in the Central and Southern United
States. In particular, approximately 35% of our stores are located in
Texas. Therefore, our business is sensitive to the economic and weather
conditions of these regions. Unusually severe or inclement weather tends to
reduce sales, particularly to DIY customers.
Dependence Upon Key and Other Personnel
Our success has been largely dependent on the efforts of certain key
personnel, including David E. O'Reilly, Lawrence P. O'Reilly, Charles H.
O'Reilly, Jr., Rosalie O'Reilly Wooten and Ted F. Wise. Our business and
results of operations could be materially adversely affected by the loss of
the services of one or more of these individuals. Additionally, our
successful implementation and management of our growth and expansion
strategies will depend on our ability to continue to attract and retain
qualified personnel. We cannot be sure that we will be able to continue to
attract such personnel. For a further discussion of our management and
personnel, see the "Business" section of Item 1 and Item 4a of this Form
10-K and of our Proxy Statement on Form 14A for the 1999 Annual Meeting
of Shareholders.
Significant Voting Control is held by the O'Reilly Family
As of the date of this Form 10-K the O'Reilly family beneficially owns
approximately 33.0% of the then outstanding shares of our common stock. As
a result, the O'Reilly family acting together will continue to be able to
exercise significant voting control over the Company, including the
election of our directors and on any other matter being voted on by our
shareholders, including any merger, sale of assets or other change in
control.
Possible Volatility of Our Stock Price
The stock market and the price of our common stock may be subject to
volatile fluctuations based on general economic and market conditions. The
market price for our common stock may also be affected by our ability to
meet analysts' expectations. Failure to meet such expectations, even
slightly, could have an adverse effect on the market price of our common
stock. In addition, stock market volatility has had a significant effect on
the market prices of securities issued by many companies for reasons
unrelated to the operating performance of these companies. In the past,
following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such a company. If similar litigation were instituted against us,
it could result in substantial costs and a diversion of our management's
attention and resources, which could have an adverse effect on our
business.
Year 2000 Issue
Historically, certain computerized systems have used two digits rather
than four to define the applicable year. Computer equipment and software
and devices with imbedded technology that are time-sensitive may recognize
a date using "00" as the year 1900 rather than the year 2000, resulting in
system failure or miscalculations. This problem is generally referred to as
the "Year 2000 issue."
Risks posed by the Year 2000 issue could include a loss of
communications links with store locations, interruptions in the nightly
replenishment of store inventories, and the inability to process
transactions, send purchase orders or engage in similar routine business
activities. We presently believe that our approach to the Year 2000 issue,
including assessment, remediation, testing of necessary changes and
contingency planning will minimize the business risk of the Year 2000
issue. However, if we do not make the necessary modifications or
conversions or do not complete them in a timely manner, it could have a
material adverse effect on our operations. In addition, our operations
could be adversely affected if we fail to retain internal personnel
dedicated to the remediation of the Year 2000 issue, if our external
vendors fail to timely deliver software corrections and if our key business
partners fail to complete their Year 2000 remediation efforts. We discuss
our Year 2000 conversion in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this Form 10-K.
Shares Eligible for Future Sale
All of the shares of common stock to be outstanding following the
completion of this offering will be tradeable without restriction by
persons other than our affiliates. All of the shares of common stock
currently held by our affiliates may be sold in reliance upon the exemptive
provisions of Rule 144 of the Securities Act of 1933, as amended, subject
to certain volume and other conditions imposed by such rule. We cannot
predict the effect, if any, that future sales of shares of common stock or
the availability of such shares for sale will have on the market price of
the common stock prevailing from time to time. Sales of substantial amounts
of common stock, or the perception that such sales might occur, could
adversely affect the prevailing market price of the common stock.
Item 2. Properties
The following table provides certain information with respect to the
Company's headquartersregarding our
administrative offices and distribution centers and offices as of December
31, 1997:
Square
Location Principal Use(s) Footage Interest
- --------------- ------------------------------- ---------- --------
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
- -----------------------
1998:
Square
Location Principal Use(s) Footage Interest
Springfield, MO Distribution Center and Corporate
Offices 274,920 Owned
Springfield, MO Corporate Offices, Training and
Technical Center 35,580 Leased(a)
Springfield, MO Corporate Offices 13,780 Leased(b)
Kansas City, MO Distribution Center and Offices 130,662 Owned
Oklahoma City, OK Distribution Center and Offices 244,460 Owned
Houston, TX Distribution Center and Offices 446,104 Owned
- --------------
(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 20142007 with an
unaffiliated party, subject to renewal for a term of 10 yearsthree five-year terms at the option of the
Company.our
option. To facilitate construction, the Companywe 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 percent6% per annum, is
payable in equal monthly installments through January 2005 and is
secured by a first deed of trust.
(b) Occupied under the terms of a lease with an unaffiliated party expiring
March 31, 2001.
Of the 259491 stores that we operated by the Company at December 31, 1997, 1311998, 253 stores
were owned, 69185 stores were leased from unaffiliated parties and 5953 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,expenses, and an original term of ten10 years, subject to one or
more renewals at the option
of the Company.our option. The original terms of 1516 stores leased from
unaffiliated parties expire prior to the end of 1998. The Company has1999. We have 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 expireexpired on December 31, 1998 subjectand were renewed
through December 31, 2004. We believe that the lease agreements with the
affiliated real estate investment partnerships are on terms comparable to
renewal at the option of the Company for
an additional period of up to six years.
The Company believesthose obtainable from third parties.
We believe that itsour present facilities are in good condition, are
adequately insured and together with those under construction, are suitable
and adequate for the conduct of itsour current operations.
ITEM 3 LEGAL PROCEEDINGS
- ------------------------------Item 3. Legal Proceedings
We are currently involved in litigation as a result of a complaint
filed against Hi/LO in May 1997 by Charles Beresky. The Companyplaintiff 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,
breach of contract, negligence, fraud, negligent misrepresentation and
breach of warranty. The plaintiff is notseeking, 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. We 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. We intend to contest this ruling by
seeking a partymandamus from the Supreme Court of Texas. We believe that the
accusations made in this case are unfounded, and intend to defend this
lawsuit vigorously. Although the extent of damages suffered by any member
of the class is arguably minimal, it is difficult at this stage of the case
to determine the likely outcome of the case or to quantify the risk that we
face from this litigation.
In addition, we and our subsidiaries are involved in various other
legal proceedings other than routine claims
and lawsuits arisingincidental to the conduct of our business. Although we
cannot ascertain the amount of liability that we may incur from any of
these matters, we do not currently believe that, in the ordinary course of its business. The Company does
not believe that such claims and lawsuits, individually or in the aggregate, they
will have a material adverse effect on the Company's business.
ITEMour consolidated financial position,
results of operations or cash flow.
Item 4 SUBMISSION OF MATTERS TOSubmission Of Matters To A VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------------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
ITEM 4A EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------------------1998.
Item 4a Executive Officers of the Company
The following paragraphs set forth certaindiscuss information with respect to theabout executive officers
of the Company who are not also directors:
Ted F. Wise, age 47, has served as Executive Vice-President has served in this capacity since
March 1993.February 1997. Mr. Wise had served as Vice President-Operations of the Companyour Senior Vice-President from June, 1984March 1993
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 positionTreasurer since March 1994 and, in addition, as Vice-President of Finance
since October 1997. Mr. Batten served as our Finance Manager of the Company from January
1993 until March 1994.being elected to his current position. From September 1986 until
joining the Companyus 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.Keehn.
PART II
ITEMItem 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------Market For Registrant's Common Equity And Related Shareholder
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"Shareholders" included on
page 28,32, is incorporated hereinhere by this reference.
ITEMItem 6 SELECTED FINANCIAL DATA
- ------------------------------------Selected Financial Data
The material contained in the Annual Shareholders' Report under the caption
"Selected Consolidated Financial Data" included on page 10pages 12 and 11,13, is
incorporated hereinhere by this reference.
ITEMItem 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ----------------------------------------------------------------------------
RESULTS OF OPERATIONS
------------------------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 1214 through 16,18 is incorporated hereinhere by this
reference.
ITEM 7(a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------------
None.
ITEMItem 7(A) Quantitative And Qualitative Disclosures About Market Risk
The Company's exposure to market risk, through derivative financial
instruments and other financial instruments is not material.
Item 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------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 1719 through 27,31, are incorporated
hereinhere by this reference.
ITEMItem 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
------------------------Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
Page 12
PART III
ITEMItem 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ---------------------------------------------------------------Directors And Executive Officers Of The Registrant
The information regarding the directors of the Company contained in the
Company's Proxy Statement on Form 14A for the 19981999 Annual Meeting of
StockholdersShareholders ("the Proxy Statement") under the caption "Election of Class
III Directors" is incorporated hereinhere 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 hereinhere by this reference.
ITEMItem 11 EXECUTIVE COMPENSATION
- ------------------------------------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 hereinhere by this reference.
ITEMItem 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ----------------------------------------------------------------------------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 hereinhere by this
reference.
ITEMItem 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------Certain Relationships And Related Transactions
The material in the Proxy Statement under the caption "Transactions with
Insiders and Others" is incorporated hereinhere by this reference.
PART IV
ITEMItem 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORMExhibits, 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, 1997,1998, are incorporated
hereinhere by this reference in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 19971998 and 19961997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 1996 and 19951996
Consolidated Statements of Stockholders'Shareholders' Equity for the years ended
December 31, 1998, 1997 1996 and 19951996
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 1996 and 19951996
Notes to Consolidated Financial Statements for the years ended
December 31, 1998, 1997 1996 and 19951996
Report of Independent Auditors
Page 13
(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 areis 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, 1997.1998.
(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
- ---------------------------------- -------------------- --------------------------------------- ------------------- -------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------- -------------------- --------------------------------------- ------------------- ----------------
Additions -
Description---------------------------------------------------------------------------------------------------
Additions- Additions-
Charged Charged to
Balance at Additionsto Costs Other- Balance
Beginning and Accounts - Charged to Other Deductions - BalanceDeductions- at End
BeginningDescription of Period Charged to Costs Accounts -Expenses Describe Describe of Period
and Expenses Describe
- ---------------------------------- -------------------- ------------------- ------------------- ------------------- --------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Deducted from asset account:
Allowance for doubtful accounts $363 $250 $1,382 $ 1,382(1) $613
Inventory reserve 0 0 160(2) 0 160
Year Endedended December 31, 1997:
Deducted from asset account: 444 662 743(1) 363
Allowance for doubtful $444 $662 $0 $743 (1) $363
accounts 0
Year Endedended December 31, 1996:
Deducted from asset account: 386 592 534 (1) 444
Allowance for doubtful $386 $592 $0 $534accounts 0
(1) $444Uncollectible accounts Year Ended December 31, 1995:
Deducted from asset account:
Allowance for doubtful $293 $467 $0 $374 (1) $386
accountswritten off.
(2) Reserves assumed upon acquisition of Hi/LO Automotive, Inc.
(1) Uncollectible accounts written off.
Page 14
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, 199825, 1999
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.
Signature Title Date
/s/David E. O'Reilly Director, President and Chief March 31, 1998
- --------------------------- Chief Executive Officer25, 1999
David E. O'Reilly Executive Officer
(principal executive officer)
/s/James R. Batten Vice-President of Finance/Finance March 31, 1998
- ---------------------------25, 1999
James R. Batten Chief Financial Officer James R. Battenand Treasurer
(principle financial officer)
/s/Lawrence P. O'Reilly Director, President and March 31, 1998
- ---------------------------25, 1999
Lawrence P. O'Reilly Chief Operating Officer
Lawrence P. O'Reilly
/s/Charles H. O'Reilly, Jr. Director and Chairman March 31, 1998
- --------------------------- of the Board March 25, 1999
Charles H. O'Reilly, Jr.
/s/Rosalie O'Reilly Wooten Director and Executive Vice-President March 31, 1998
- --------------------------- Vice-President25, 1999
Rosalie O'Reilly Wooten
/s/Charles H. O'Reilly, Sr. Director and Chairman Emeritus March 31, 1998
- ---------------------------25, 1999
Charles H. O'Reilly, Sr.
/s/Jay D. Burchfield Director March 31, 1998
- ---------------------------25, 1999
Jay D. Burchfield
/s/Joe C. Greene Director March 31, 1998
- ---------------------------25, 1999
Joe C. Greene
/s/Chris T. Stange Director of Accounting/ March 31, 1998
- ---------------------------- Controller
Chris T. Stange (principal accounting officer)
Page 15
EXHIBIT INDEX
Exhibit
No. Description
- ------- ---------------------------------------------------------------------
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*Exhibit No. Description
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 Registrant's 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 as Exhibit
10.4 to the Registrant's Annual Shareholders' Report on
Form 10-K for the year ended December 31, 1997.
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
here 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.
Page E - 1
EXHIBIT INDEX (continued)
Exhibit
No. Description
- ------- ----------------------------------------------------------------------
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, 199310.13 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 to the
Registrant's Annual Shareholders' Report on Form 10-K for
the year ended December 31, 1996.
10.16 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.
10.17 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.
10.18 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, filed as Exhibit 10.17 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
10.19 Credit Agreement between the Registrant and NationsBank,
N.A. , dated January 27, 1998, filed as Exhibit 10.20 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
10.20 Third Amendment to the O'Reilly Automotive, Inc. 1993 Stock
Option Plan, filed as Exhibit 10.21 to the Registrant's
Amended Quarterly Report on Form 10-Q/A for the quarter
ended March 31, 1998.
10.21 First Amendment to the O'Reilly Automotive, Inc. Directors'
Stock Option Plan, filed as Exhibit 10.22 to the
Registrant's Amended Quarterly Report on Form 10-Q/A for
the quarter ended March 31, 1998.
10.22 O'Reilly Automotive, Inc. Deferred Compensation Plan, filed
as Exhibit 10.23 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
10.23 Trust Agreement between the Registrant's Deferred
Compensation Plan and Bankers Trust, dated February 2,
1998, filed as Exhibit 10.24 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
13.1 Portions of the 1998 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.
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.
- ------------------------------------
* Previously filed as Exhibit of same number to the Registration
Statement of the Registrant on Form S-1, File No.33-58948,No. 33-58948, and
incorporated hereinhere 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
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1998 Annual Report to Shareholders
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except
per share data)
INCOME STATEMENT DATA:
Product sales $616,302 $316,399 $259,243 $201,492 $167,057 $137,164 $110,147 $94,937 $82,372 $71,935
Cost of goods sold,
including warehouse
and distribution
expenses 358,439 181,789 150,772 116,768 97,758 82,102 65,066 56,255 50,027 44,930
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 257,863 134,610 108,471 84,724 69,299 55,062 45,081 38,682 32,345 27,005
Operating, selling,
general and
administrative expenses 200,962 97,526 79,620 62,687 52,142 42,492 35,204 29,961 26,750 2 3,231
- --------------------------------------------------------------------------------------------------------------------------
Operating income 56,901 37,084 28,851 22,037 17,157 12,570 9,877 8,721 5,595 3,774
Other income
(expense),net (6,958) 472 1,182 236 376 216 204 (104) (566) (367)
Provision for
income taxes 19,171 14,413 11,062 8,182 6,461 4,556 3,686 3,167 1,837 1,269
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before
cumulative effects
of changes in
accounting principles 30,772 23,143 18,971 14,091 11,072 8,230 6,395 5,450 3,192 2,138
Cumulative effects of
changes in accounting
principles - - - - - - (163) - - -
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations 30,772 23,143 18,971 14,091 11,072 8,230 6,232 5,450 3,192 2,138
Income (loss) from
discontinued operations - - - - - 48 129 (68) (186) (49)
- --------------------------------------------------------------------------------------------------------------------------
Net income $30,772 $23,143 $18,971 $14,091 $11,072 $8,278 $6,361 $5,382 $3,006 $2,089
==========================================================================================================================
Basic Earnings Per
Common Share:
Income per share from
continuing operations
before cumulative
effects of changes
in accounting principles $ 1.45 $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15
==========================================================================================================================
Income per share from
continuing operations $ 1.45 $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.42 $ 0.37 $ 0.22 $ 0.15
Income (loss) per share
from discontinued
operations - - - - - - 0.01 - (0.01) -
- --------------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.45 $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.21 $ 0.15
==========================================================================================================================
Cash dividends per share $ - $ - $ - $ - $ - $ - $0.0009 $0.0008 $0.0008 $0.0008
Weighted average common
shares outstanding 21,238 21,043 20,864 17,820 17,310 16,470 14,718 14,654 14,622 14,612
==========================================================================================================================
Earnings Per Common Share -
Assuming Dilution:
Income per share from
continuing operations
before cumulative
effects of changes in
accounting principles $ 1.42 $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15
==========================================================================================================================
Income per share from
continuing operations $ 1.42 $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.42 $ 0.37 $ 0.22 $ 0.15
Income (loss) per share
from discontinued
operations - - - - - 0.01 - - (0.01) -
- --------------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.42 $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.21 $ 0.15
==========================================================================================================================
Weighted average common
shares outstanding -
adjusted (d) 21,602 21,277 21,032 17,902 17,389 16,523 14,718 14,654 14,622 14,612
==========================================================================================================================
SELECTED OPERATING DATA:
Number of stores at
year end (a) 491 259 219 188 165 145 127 116 112 106
Total store square
footage at year end
(in 000's) (b) 3,172 1,454 1,155 923 785 671 571 511 480 427
Weighted average
product sales per
store (in 000's) (b) $1,368 $1,306 $1,239 $1,101 $1,007 $949 $838 $759 $690 $637.
Weighted average
product sales per
square foot (b) $238.0 $235.8 $242.2 $227.3 $215.4 $208.7 $187.2 $174.4 $166.2 $160.0
Percentage increase in
same-store product sales(c) 6.8% 6.8% 14.4% 8.9% 8.9% 14.9% 11.4% 9.2% 11.2% 8.5%
BALANCE SHEET DATA:
Working capital $208,363 $93,763 $74,403 $80,471 $41,416 $41,193 $15,251 $13,434 $11,634 $9,853
Total assets 493,288 247,617 183,623 153,604 87,327 73,112 58,871 49,549 46,148 45,200
Short-term debt 13,691 130 3,154 231 311 495 3,462 1,298 2,281 3,897
Long-term debt, less
current portion 170,166 22,641 237 358 461 732 2,668 3,326 5,082 5,684
Long-term debt related
to discontinued
operations, less
current portion - - - - - - 9,873 10,316 9,901 9,961
Shareholders' equity 218,394 182,039 155,782 133,870 70,224 57,805 29,281 22,881 17,480 14,471
(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. Two stores were closed during 1997 and one was closed in 1998.
No other stores were closed during the periods presented. Additionally,
seven former Hi/LO stores located in California were sold in 1998.
(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 stores open during both full periods being
compared. Percentage increase in same-store product sales is calculated
based on store sales results which exclude sales of specialty machinery,
sales by outside salesmen and sales to employees.
(d) There was no additional dilution until 1993 when options were first
granted.
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 annual report.
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 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:
Years Ended December 31,
1998 1997 1996
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 32.6 30.8 30.7
------------------------------------------
Operating income 9.2 11.7 11.1
Other income (expense) (1.1) 0.1 0.5
------------------------------------------
Income before income taxes 8.1 11.8 11.6
Provision for income taxes 3.1 4.5 4.3
==========================================
Net income 5.0% 7.3% 7.3%
==========================================
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.
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 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.
The unaudited operating data presented below should be read in
conjunction with our consolidated financial statements and related notes
included elsewhere in this annual report, and the other financial
information included here.
Fiscal 1998
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
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
Fiscal 1997
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
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
dilution share--assuming.............. $ 0.24 $ 0.29 $ 0.31 $ 0.25
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 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.
Consolidated Balance Sheets
December 31,
1998 1997
----------------------
(In thousands)
Assets
Current assets:
Cash $ 1,728 $ 2,285
Short-term investments 500 1,000
Accounts receivable, less allowance for doubtful accounts
of $613 in 1998 and $363 in 1997 27,580 12,469
Amounts receivable from vendors 26,660 4,969
Inventory 246,012 111,848
Refundable income taxes 3,026 --
Deferred income taxes 2,838 1,424
Other current assets 2,538 145
-----------------------
Total current assets 310,882 134,140
Property and equipment, at cost:
Land 40,131 28,000
Buildings 81,770 53,507
Leasehold improvements 17,898 9,230
Furniture, fixtures and equipment 56,897 36,362
Vehicles 13,511 10,434
-----------------------
210,207 137,533
Accumulated depreciation and amortization 39,256 29,093
-----------------------
170,951 108,440
Deferred income taxes 3,178 --
Notes receivable 4,137 2,280
Other assets 4,140 2,757
=======================
Total assets $493,288 $247,617
=======================
Liabilities and shareholders' equity Current liabilities:
Note payable to bank $ 5,000 $ --
Accounts payable 66,737 29,713
Accrued expenses 18,446 6,386
Accrued payroll 3,645 1,647
Income taxes payable -- 2,501
Current portion of long-term debt 8,691 130
-----------------------
Total current liabilities 102,519 40,377
Long-term debt, less current portion 170,166 22,641
Other liabilities 2,209 415
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--21,349,700 in 1998 and
21,125,493 in 1997 213 211
Additional paid-in capital 82,658 77,077
Retained earnings 135,523 104,751
-----------------------
Total shareholders' equity 218,394 182,039
-----------------------
Total liabilities and shareholders' equity $493,288 $247,617
=======================
See accompanying notes.
Consolidated Statements Of Income
Years ended
December 31,
1998 1997 1996
----------------------------------------
(In thousands, except per share data)
Product sales $616,302 $316,399 $259,243
Cost of goods sold, including warehouse and
distribution expenses 358,439 181,789 150,772
Operating, selling, general and administrative 200,962 97,526 79,620
expenses
----------------------------------------
559,401 279,315 230,392
----------------------------------------
Operating income 56,901 37,084 28,851
Other income (expense):
Interest expense (8,126) (139) (37)
Interest income 396 198 676
Other, net 772 413 543
----------------------------------------
(6,958) 472 1,182
----------------------------------------
Income before income taxes 49,943 37,556 30,033
Provision for income taxes 19,171 14,413 11,062
----------------------------------------
Net income $30,772 $23,143 $18,971
========================================
Basic income per common share:
Net income per common share $ 1.45 $ 1.10 $ 0.91
========================================
Weighted average common shares outstanding 21,238 21,043 20,864
========================================
Income per common share--assuming dilution:
Net income per common share--assuming dilution $ 1.42 $ 1.09 $ 0.90
========================================
Adjusted weighted average common shares outstanding 21,602 21,277 21,032
========================================
See accompanying notes.
Consolidated Statements Of Shareholders' Equity
Additional
Common Stock Paid-In Retained
Shares Par Value Capital Earnings Total
------------------------------------------------------
(In thousands)
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
======================================================
See accompanying notes.
Consolidated Statements Of Cash Flows
Years ended December 31,
1998 1997 1996
----------------------------------
(In thousands)
Operating activities
Net income $ 30,772 $23,143 $18,971
Adjustments to reconcile net income to net cash
provided by (used in)
Operating activities:
Depreciation and amortization 12,164 8,276 6,105
Provision for doubtful accounts 250 662 592
Gain on sale of property and equipment (134) (44) (281)
Deferred income taxes 7,629 (1,042) 1,483
Common stock contributed to employee benefit plans 1,629 1,331 1,028
Tax benefit of stock options exercised 839 301 --
Postretirement benefits 12 12 12
Changes in operating assets and liabilities, net of the
effects of the acquisition:
Accounts receivable (5,809) (1,835) (2,428)
Amounts receivable from vendors (21,691) (2,100) (473)
Inventory (53,328) (27,939) (24,930)
Refundable income taxes (5,527) 172 564
Other current assets (179) (446) 603
Other assets (1,753) (581) (709)
Accounts payable 20,071 12,425 4,275
Accrued expenses (525) 2,433 830
Accrued payroll (3,533) 604 (765)
Income taxes payable -- 2,501 --
----------------------------------
Net cash provided by (used in) operating
activities (19,113) 17,873 4,877
Investing activities
Purchases of property and equipment (57,732) (37,180) (34,459)
Acquisition, net of cash acquired (49,296) -- --
Proceeds from sale of property and equipment 6,038 293 801
Purchases of short-term investments -- -- (12,494)
Proceeds from sale of short-term investments 500 -- 34,904
Payments received on notes receivable 372 898 51
Advances made on notes receivable (650) (1,668) (21)
----------------------------------
Net cash used in investing activities (100,768) (37,657) (11,218)
Financing activities
Borrowings on notes payable to bank 5,000 -- 3,000
Proceeds from issuance of long-term debt 157,860 20,500 --
Principal payments on long-term debt (46,651) (1,120) (198)
Net proceeds from issuance of common stock 3,115 1,482 1,913
----------------------------------
Net cash provided by financing activities 119,324 20,862 4,715
----------------------------------
Net increase (decrease) in cash (557) 1,078 (1,626)
Cash at beginning of year 2,285 1,207 2,833
----------------------------------
Cash at end of year $ 1,728 $2,285 $1,207
==================================
See accompanying notes.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
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 $246,402,000 and $119,135,000 as of
December 31, 1998 and 1997, respectively.
Amounts Receivable from Vendors
Amounts receivable from vendors consist primarily of amounts due the
Company for change-over merchandise, 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.
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, 1998 and 1997, were $1,213,000 and $527,000, 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 $8,326,000, $3,437,000 and
$3,156,000 for the years ended December 31, 1998, 1997 and 1996,
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.
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 $2,203,000
and $2,271,000 at December 31, 1998 and 1997, 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, 1998, 1997 and
1996.
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.
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 1998 and 1997 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.
1998 1997
-----------------------------------
(In thousands, except per share data)
Product sales $ 634,072 $ 554,719
Net income $ 29,443 $ 22,782
Net income per share--assuming dilution $ 1.36 $ 1.07
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, 1998 and 1997, 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 $2,158,000 in 1998, $2,122,000 in 1997 and $1,729,000 in
1996.
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 $255,032 and $271,000, at December 31, 1998 and
1997, 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 $1,990,000 and $633,000 at December 31, 1998
and 1997, respectively.
Principal maturities of long-term debt for each of the next five years
ending December 31 are as follows (amounts in thousands):
1999 $ 8,691
2000 13,164
2001 12,657
2002 15,011
2003 129,118
Thereafter 216
--------
$178,857
========
Cash paid by the Company for interest during the years ended December
31, 1998, 1997 and 1996 amounted to $8,509,000, $642,000 and $35,000,
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):
1999 $11,824
2000 10,695
2001 10,281
2002 9,030
2003 7,675
Thereafter 34,000
--------
$83,505
========
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 $13,862,000, $4,136,000 and $3,348,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 7--COMMITMENTS
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,
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 $1,818,000 in 1998, $1,485,000 in 1997 and
$1,229,000 in 1996. 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:
Year Market
Contributed Shares Value
------------------------------------
1998 15,719 $514,000
1997 20,913 415,000
1996 19,786 344,000
Profit-sharing contributions accrued at December 31, 1998, 1997 and
1996 were funded in the next year through issuance of shares of the
Company's common stock as follows:
Year Market
Funded Shares Value
------------------------------------
1998 36,193 $1,070,000
1997 49,540 884,000
1996 39,652 684,000
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, 1998, 1997 and 1996 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,
37,316 shares were issued at an average price of $30.09 per share during
1998, 32,584 shares were issued at an average price $17.49 per share during
1997 and 32,936 shares were issued at an average price of $14.61 per share
during 1996.
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, 2,679, 1,386 and 556 shares
were issued during 1998, 1997 and 1996, 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 Shareholder 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:
Number
Price per Share Of Shares
----------------------------------
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
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
=================
Options to purchase 799,550, 521,700 and 637,700 shares of common
stock were exercisable at December 31, 1998, 1997 and 1996, 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:
Number
Price per Share Of Shares
----------------------------------
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
=================
All options under this plan were exercisable at December 31, 1998,
1997 and 1996.
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 1998, 1997 and 1996, respectively:
risk-free interest rates of 4.74%, 5.53% and 5.39%; volatility factors of
the expected market price of the Company's common stock of .221, .200 and
.200; and weighted-average expected life of the options of 8.0, 6.4 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, 1998, 1997 and 1996 were $12.88, $8.28, and $4.79,
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:
1998 1997 1996
------------------------------------
(In thousands, except per share data)
Pro forma net income $29,242 $22,432 $18,494
====================================
Pro forma basic net income per share $ 1.38 $ 1.07 $ 0.89
====================================
Pro forma net income per share--
assuming dilution $ 1.35 $ 1.05 $ 0.88
====================================
NOTE 12--INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
income per common share:
Years ended December 31,
1998 1997 1996
---------------------------------
(In thousands, except per share data)
Numerator (basic and diluted):
Net income $30,772 $23,143 $18,971
=================================
Denominator:
Denominator for basic income per common share--
Weighted-average shares 21,238 21,043 20,864
Effect of employee stock options (Note 11) 364 234 168
---------------------------------
Denominator for diluted income per common share
adjusted weighted-average shares and assumed
conversions. 21,602 21,277 21,032
=================================
Basic net income per common share $ 1.45 $ 1.10 $ 0.91
=================================
Net income per common share--assuming dilution $ 1.42 $ 1.09 $ 0.90
=================================
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:
1998 1997
-----------------------------------
(In thousands)
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 225 $ 138
Vacation accrual 852 567
Inventory carrying value -- 636
Other accruals 3,031 83
-----------------------------------
4,108 1,424
Noncurrent:
Property and equipment 1,843 --
Other 1,335 158
-----------------------------------
3,178 158
-----------------------------------
Total deferred tax assets 7,286 1,582
Deferred tax liabilities:
Current:
Inventory carrying value 1,270 --
-----------------------------------
1,270 --
Noncurrent:
Property and equipment -- 2,273
Other accruals -- 30
-----------------------------------
Total deferred tax liabilities 1,270
Net deferred tax assets (liabilities) $6,016 $(721)
===================================
The provision for income taxes consists of the following:
Current Deferred Total
--------------------------------------------------------------------
(In thousands)
1998:
Federal $10,386 $ 6,852 $17,238
State...... 1,156 777 1,933
--------------------------------------------------------------------
$11,542 $ 7,629 $19,171
====================================================================
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
====================================================================
A reconciliation of the provision for income taxes to the amounts
computed at the federal statutory rate is as follows:
1998 1997 1996
-----------------------------------------
(In thousands)
Federal income taxes at statutory rate $17,480 $13,145 $10,512
State income taxes, net of federal tax benefit 1,256 1,148 809
Other items, net 435 120 (259)
-----------------------------------------
$19,171 $14,413 $11,062
=========================================
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, 1998, 1997 and 1996, cash paid by
the Company for income taxes amounted to $16,229,000, $12,168,000 and
$9,015,000, 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
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------
(In thousands, except per share data)
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
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
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 3,340,000
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.
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, 1998 and
1997, 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, 1998 and 1997,
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
NUMBER OF STOCKHOLDERS
As of December 31, 1998, O'Reilly Automotive, Inc. had approximately 10,000
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 price 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.
1998 1997
High Low High Low
First Quarter $ 30 1/2 $ 24 5/8 $ 19 1/16 $ 15 1/2
Second Quarter 36 3/4 25 5/8 19 7/8 16 7/8
Third Quarter 39 1/2 28 5/8 26 18 7/8
Fourth Quarter 48 3/8 31 5/8 28 21
For the Year 48 3/8 24 5/8 28 15 1/2
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 21.1 - Subsidiaries of the Company
Subsidiary State of Incorporation
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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.
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
March 2, 1999, included in the 1998 Annual Report to Shareholders 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
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 incorporated herein by reference, and our report included in the
preceding paragraph with respect to the consolidated financial statement
schedule included in this Annual Report (Form 10-K) of O'Reilly Automotive,
Inc. for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
March 25, 1999