19
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, 2003
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 65802
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(Address of principal executive offices, zip code)
(417) 862-6708
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained 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. [ ]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No _____
At February 27, 2004, an aggregate of 54,674,483 shares of the common stock of
the registrant was outstanding. As of that date, the aggregate market value of
the voting stock held by non-affiliates of the Company was approximately
$2,221,424,244 based on the last sale price of the common stock reported by the
Nasdaq Stock Market (National Market).
At June 30, 2003, an aggregate of 53,933,788 shares of the common stock of the
registrant was outstanding. As of that date, the aggregate market value of the
voting stock held by non-affiliates of the Company was approximately
$1,805,163,884 based on the last sale price of the common stock reported by the
Nasdaq Stock Market (National Market).
DOCUMENTS INCORPORATED BY REFERENCE
As provided below, portions of the registrant's documents specified below are
incorporated here by reference:
<table>
<caption>
Document Part-Form 10-K
- ---------------------------------------------------------- ----------------
<s> <c>
Portions of the Annual Shareholders' Report for the Year
Ended December 31, 2003 Part II
Proxy Statement for 2004 Annual Meeting of Shareholders (to
be filed pursuant to Regulation 14A within 120 days of the
end of registrant's most recently completed fiscal year) Parts I and III
</table>
<page>
Forward Looking Information
We claim the protection of the safe-harbor for forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Certain statements contained within this Form 10-K discuss, among other things,
expected growth, store development and expansion strategy, business strategies,
future revenues and future performance. These forward-looking statements are
based on estimates, projections, beliefs and assumptions and are not guarantees
of future events and results. Such statements are subject to risks,
uncertainties and assumptions, including, but not limited to, competition,
product demand, the market for auto parts, the economy in general, inflation,
consumer debt levels, governmental approvals, our ability to hire and retain
qualified employees, risks associated with the integration of acquired
businesses, weather, terrorist activities, war and the threat of war. Actual
results may materially differ from anticipated results described in these
forward-looking statements. 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 here by reference) and the "Risk Factors" discussed
below.
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.
and its subsidiaries.
PART I
Item 1. Business
O'Reilly Automotive, Inc. is one of the largest specialty retailers of
automotive aftermarket parts, tools, supplies, equipment and accessories in the
United States, selling our products to both do-it-yourself (DIY) customers and
professional installers. At December 31, 2003, we operated 1,109 stores in
Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Tennessee,
Texas and Virginia. Our stores carry an extensive product line consisting of:
o new and remanufactured automotive hard parts, such as alternators,
starters, fuel pumps, water pumps, brake shoes and pads, chassis parts and
engine parts;
o maintenance items, such as oil, antifreeze, fluids, engine additives and
appearance products;
o accessories, such as floor mats and seat covers; and
o a complete line of autobody paint and related materials, automotive tools
and professional service equipment.
We do not sell tires or perform automotive repairs or installations.
We were founded in 1957 by Charles F. O'Reilly and his son, Charles H.
"Chub" O'Reilly, Sr. and initially operated from a single store in Springfield,
Missouri. The O'Reilly family has managed the Company since our inception.
Our goal is to continue to achieve growth in sales and profitability by
capitalizing on our competitive advantages and executing our growth and
expansion strategies.
See "Risk Factors" beginning on page 12 for a description of certain risks
relevant to our business. 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
weather conditions, our dependence upon key and other personnel and the
significant voting control held by our principal shareholders.
2
<page>
Competitive Advantages
Proven Ability to Execute Dual Market Strategy. We have an established
track record of serving both DIY customers and professional 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 consumers of automotive aftermarket parts;
o capitalize on our existing retail and distribution infrastructure;
o profitably operate both in large markets and less densely populated
geographic areas that 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. For
2003, we derived approximately 53% of our product sales from our DIY customers
and approximately 47% from our professional installer customers. As a result of
our historical success in executing our dual market strategy and our 173
full-time sales representatives dedicated solely to calling upon and selling to
the professional installer, we believe we will increase the sales to
professional installers and have a competitive advantage over our retail
competitors who have only recently entered and begun focusing on the
professional installer market.
Superior Customer Service. We seek to attract new DIY and professional
installer customers and to retain existing customers by offering superior
customer service, the key elements of which include:
o superior in-store service through highly-motivated, technically proficient
store personnel (Professional Parts People) using advanced point-of-sale
systems;
o an extensive selection of products;
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 eighteen, contiguous states (Alabama,
Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Tennessee,
Texas and Virginia) and the strategic locations of our ten distribution centers
enable us to maintain optimum inventory levels throughout our store network. In
addition, our inventory management and distribution systems electronically link
each 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 access to approximately 100,000 SKUs, many of which are
hard to find items not typically stocked by other parts retailers. We believe
the availability of a broad range of products is a key competitive advantage in
satisfying customer demand and generating repeat business.
Experienced Management Team. Our management team has a demonstrated ability
to successfully execute our business plan, including the identification and
integration of strategic acquisitions. We have experienced eleven consecutive
years of record revenues and earnings growth since becoming a public company in
April 1993. We have a strong senior management team comprised of 57
professionals who average 16 years of experience with O'Reilly. In addition, our
106 district managers average over 9 years of experience with us.
3
<page>
Growth and Expansion Strategies
Aggressively Open New Stores. We intend to continue to aggressively open
new stores in order to achieve greater penetration in existing markets and to
expand into new, contiguous markets. We plan to open approximately 140 stores in
2004 and approximately 150 stores in 2005. A majority of the sites for our
proposed 2004 store openings and several of the sites for our proposed 2005
store openings have been identified. 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 areas such as management, advertising and
distribution.
We target both small (population less than 100,000) and large markets
(population greater than 100,000) for expansion of our store network. Of the 128
net, new stores added in 2003, 25 are located in Alabama, 5 in Arkansas, 3 in
Florida, 9 in Illinois, 1 in Indiana, 1 in Iowa, 2 in Kansas, 10 in Kentucky, 3
in Louisiana, 16 in Mississippi, 2 in Missouri, 15 in North Carolina, 17 in
Tennessee, 18 in Texas and 1 in Virginia. While we have faced, and expect to
continue to face, more aggressive competition in the more densely populated
markets, we believe that we have competed effectively, and that we are well
positioned to continue to compete effectively, in such markets and achieve our
goal of continued sales and profit growth within these markets. We also believe
that because of our dual market strategy, we are better able to operate stores
in less densely populated areas within our regional market, which would not
otherwise support a national or regional chain store selling to one portion of
the market or the other. Consequently, we expect to continue to open new stores
in less densely populated market areas.
To date, we 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. We typically open new
stores either by (i) constructing a new store at a site we purchase or lease and
stocking the new store with fixtures and inventory, or (ii) acquiring an
independently owned auto parts store, typically by the purchase of substantially
all of the inventory and other assets (other than realty) of such store. Store
sites are strategically located in clusters within geographic areas that
complement our distribution system in order to achieve economies of scale in
management, advertising and distribution costs. Other key factors we 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, other competing 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.
Same store growth through increased sales and profitability is also an
important part of our growth strategy. To achieve improved sales and
profitability at existing O'Reilly stores, we continually strive to improve upon
the service provided to our customers. We 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), resulting from superior customer service that generates
increased sales and profitability.
4
<page>
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.
Continually Enhance Store Design and Location. Our current prototype store
design features enhancements such as greater square footage, higher ceilings,
more convenient interior store layouts, brighter lighting, increased parking
availability and dedicated counters to serve professional 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 stores to
conform with our prototype store design. We believe that our ability to
consistently achieve growth in same store product sales is due in part to our
commitment to maintaining an attractive store network, which is strategically
located to best serve our customers.
Products and Purchasing
Our stores offer DIY and professional installer customers a wide selection
of brand name and private label products for domestic and imported automobiles,
vans and trucks. We do not sell tires or perform automotive repairs or
installations. Our merchandise generally consists of nationally recognized,
well-advertised, name brand products such as AC Delco, Moog, Murray, Wagner,
Gates Rubber, Federal Mogul, Monroe, Prestone, Quaker State, Pennzoil, Castrol,
Valvoline, STP, BWD, Cardone, Wix, Armor All and Turtle Wax. In addition to name
brand products, our stores carry a wide variety of high-quality private label
products under our O'Reilly Auto Parts, SuperStart, BrakeBest, Ultima, Master
Pro and Omnispark 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 38% of our total purchases in 2003.
Our largest vendor in 2003 accounted for approximately 15% of our total
purchases and the next four largest vendors accounted for 4-11% of such
purchases each. 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 payment
and seasonal purchasing discounts offered by our vendors, and to utilize
extended dating terms available from vendors due to volume purchasing. During
2003, we entered into various programs and arrangements with certain of our
vendors that provide for extended dating and payment terms for inventory
purchases, including pay-on-scan arrangements. We consider our relationships
with our suppliers to be good.
5
<page>
Inflation and Seasonality
We have been successful, in many cases, in reducing the effects of
merchandise cost increases principally by taking advantage of vendor incentive
programs, economies of scale resulting from increased volume of purchases and
selective forward buying. As a result, we do not believe our operations have
been materially affected by inflation.
Our business is seasonal to some extent primarily as a result of the impact
of weather conditions on store sales. Store sales and profits have historically
been higher in the second and third quarters (April through September) of each
year than in the first and fourth quarters.
Store Network
Store Locations. As a result of our dual market strategy, we are able to
profitably operate in both large, densely populated markets and less densely
populated areas that 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:
<table>
<caption>
Number of
State Stores
-------------- ----------
<s> <c>
Alabama 43
Arkansas 72
Florida 7
Georgia 8
Illinois 19
Indiana 6
Iowa 64
Kansas 57
Kentucky 21
Louisiana 50
Mississippi 32
Missouri 132
Nebraska 24
North Carolina 15
Oklahoma 99
Tennessee 78
Texas 381
Virginia 1
----------
Total 1,109
</table>
Our stores on average carry approximately 22,000 SKUs and average
approximately 6,600 total square feet in size. At December 31, 2003, we had a
total of approximately 7.3 million square feet in our 1,109 stores. Our stores
are served primarily by the nearest distribution center, but also have access to
the broader selection of inventory available at one of our 61 Master Inventory
Stores, which on average carry approximately 36,000 SKUs and average
approximately 8,800 square feet in size. Master Inventory Stores, in addition to
serving DIY and professional installer customers in their markets, also provides
our other stores within their area access to a greater selection of SKUs on a
same-day basis.
6
<page>
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 our stores are freestanding
buildings situated on or near major traffic thoroughfares, and offer ample
parking and easy customer access.
Store Layout. 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. Aisle displays are generally used to feature high-demand or seasonal
merchandise, new items and advertised specials.
Store Automation. To enhance store level operations and customer service,
we use IBM AS/400 computer systems in all of our stores. These systems are
linked with the IBM AS/400 computers located in each of our distribution
centers. Our point-of-sale terminals provide immediate access to our electronic
catalog to display parts and pricing information by make, model and year of
vehicle and use bar code scanning technology to price our merchandise. This
system speeds transaction times, reduces register lines and provides enhanced
customer service. Moreover, our store automation systems capture sales
information which assists in store management, strategic planning, inventory
control and distribution efficiency.
New Store Site 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 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.
7
<page>
Distribution System
The following table sets forth the distribution centers we currently
operate:
<table>
<caption>
Distribution Square Footage
Location Center (1) Office Total
- ----------------- ------------- --------- ---------------
Dallas, TX 442,376 21,889 464,265
Des Moines, IA 178,391 8,325 186,716
Houston, TX 483,858 21,280 505,138
Kansas City, MO 128,064 2,590 130,654
Knoxville, TN 153,664 9,725 163,389
Little Rock, AR 89,852 7,200 97,052
Mobile, AL 301,068 23,721 324,789
Nashville, TN 346,604 35,000 381,604
Oklahoma City, OK 296,600 5,940 302,540
Springfield, MO 308,234 111,122 (2) 419,356
------------- --------- ---------------
2,728,711 246,792 2,975,503
<fn>
(1) Includes both floor and mezzanine square footage.
(2) Includes square footage for corporate offices, technical center and
training center.
</fn>
</table>
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 a 20,000 square foot
returned goods processing facility. We also operate a 31,000 square foot bulk
warehouse in McAllen, Texas that serves the surrounding distribution centers
with bulk products.
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 our 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 2004 we plan to:
o continue to implement improvement plans to increase inventory turnover in
all distribution centers; and
o upgrade material handling equipment in several distribution centers
including conveyor systems, forklifts and racking.
8
<page>
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 to car
enthusiasts, who we believe on an individual basis spend more on automotive
products than the public generally, we sponsor 16 nationally televised races and
over 288 motorsports races and car shows at over 200 facilities in 18 states,
including, the NASCAR Craftsmen Truck Series, the NASCAR Busch Series race in
Dallas, five National Hotrod Racing Association races in Topeka, Memphis,
Houston and Dallas, as well as the O'Reilly Chili Bowl. O'Reilly Auto Parts is
the "official auto parts store" of Texas Motor Speedway, Kansas Speedway,
Bristol Motor Speedway, Houston Raceway Park, Texas Motorplex, Memphis
Motorsports Park and Heartland Park. During 2003, we started work on branding
the O'Reilly name in the NCAA. Our first initiative was to partner with Texas
Tech University through a variety of programs including sponsoring of coach
Knight's TV show, ads during games, placing the O'Reilly logo on the home
basketball court and coach Knight's sweater, advertising on the backs of seats
and banners for the scoring table. This has lead to additional opportunities
with approximately 14 colleges in our current markets. We have found that the
more progressive marketing concepts utilized in the DIY portion of our business
can also be applied to increase sales to our professional installer customers.
Marketing to the Professional Installer. We have over 173 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. Our First Call program, which is
our commitment to the professional customer, includes a dedicated sales force,
sales and promotions directed to the professional installer and overnight
delivery service from the distribution center to the professional customer.
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 First Call marketing strategy, with respect to professional
installers, emphasizes our ability to offer:
o prompt delivery using small trucks or vans operated by virtually all of our
stores;
o a separate counter in all 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 Independently Owned Parts Store. Along with the operation
of the distribution centers and the distribution of automotive products to the
O'Reilly stores, Ozark Automotive Distributors, Inc. (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. We generally do
not compete with any independently owned parts store to which 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 staff
of three.
Of the approximately 215 independently owned parts stores currently
purchasing automotive products from Ozark, 211 participate in the Auto Value
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 membership through the display of the Auto
Value logo, which is owned by The Alliance, Inc. (formerly known as Auto Value
Associates, Inc.), a non-profit buying group consisting of approximately 4,500
members as of December 31, 2003, including O'Reilly, engaged in the distribution
or sale of automotive products. Additionally, we provide advertising and
promotional assistance to Auto Value stores purchasing automotive products from
Ozark, as well as marketing and sales support. In return for a commitment to
purchase automotive products from Ozark, we offer assistance to an Auto Value
independently owned parts store by making available computer software for
inventory control.
9
<page>
Management Structure
Each of our stores is staffed with a store manager and an assistant
manager, in addition to the parts specialists and support staff required to meet
the specific needs of each store. Each of our 106 district managers has general
supervisory responsibility for an average of 10 stores within such manager's
district.
Each district manager receives comprehensive training on a bi-monthly
basis, focusing on management techniques, new product announcements, advanced
automotive systems and our policies and procedures. In turn, the information
covered at such bi-monthly meetings is discussed in full by district managers at
bi-monthly meetings with their store managers. All assistant managers and
manager trainees are required to successfully complete a six-month manager
training program, which includes classroom and field training, as a prerequisite
to becoming a store manager. This program covers operations extensively, as well
as principles of successful management. Shortly after becoming a store manager,
all managers attend a manager development program, at the corporate office
headquarters, which includes 72 hours of classroom training. Upon returning to
the stores, managers are given continuous field training throughout their
management experience.
We provide financial incentives to our district managers, store managers,
assistant managers and sales specialists through an incentive compensation
program. Under our incentive compensation program, base salary is augmented by
incentive compensation based upon the achievement of sales and profitability
goals. We believe that our incentive compensation program significantly
increases the motivation and overall performance of our Professional Parts
People and our ability to attract and retain qualified management and other
personnel.
Most of our current senior management, district managers and store managers
were promoted to their positions from within the Company. Our senior management
team averages 16 years of experience with the Company and district managers have
an average length of service with the Company of over 9 years.
Professional Parts People
We believe our highly trained team of Professional Parts People is
essential in providing superior service both to DIY and professional installer
customers. Each of our Professional Parts People is required to be technically
proficient in the workings and application 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 Parts People to provide such
assistance to the 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 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 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 program, selected team members complete two days of extensive sales
call training for business development, after which these team members will
spend one day per week calling on existing and new professional installer
customers. Additionally, each team member engaged in such sales activities will
participate in quarterly advanced training programs for sales and business
development.
10
<page>
Customer Service
We seek to provide our customers with an efficient 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 on the sales movement shown by our computerized inventory control system
and on management's assessment of the changes and trends in the marketplace.
Pricing
We believe 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 that we sell are priced at
discounts to the manufacturer suggested prices, and additional savings are
offered through volume discounts and special promotional pricing. Consistent
with our low price guarantee, each of our stores will match any verifiable price
on any in-stock product of the same or comparable quality offered by any of our
competitors.
Competition
We compete in both the DIY and professional installer portions of the
automotive aftermarket. We compete primarily with:
o national and regional retail automotive parts chains (such as AutoZone,
Inc., Advance Auto Parts, CSK Auto Corp. and The Pep Boys-Manny, Moe and
Jack, Inc.);
o independently owned parts stores;
o wholesalers or jobber stores (some of which are associated with national
automotive parts distributors or associations such as NAPA and CarQuest);
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.
11
<page>
Team Members
As of December 31, 2003, we had 12,635 full-time team members and 2,919
part-time team members, of whom 12,023 were employed at our stores, 2,587 were
employed at our distribution centers and 944 were employed at our corporate and
administrative headquarters. Our team members are not subject to a collective
bargaining agreement. We consider our relations with our team members to be
excellent, and strive to promote good relations with our team members through
various programs designed for such purposes.
Servicemarks and Trademarks
We have registered the servicemarks O'Reilly Automotive, O'Reilly Auto
Parts, and Parts Payoff and the trademarks SuperStart, BrakeBest, Omnispark,
First Call, Ultima, and Master Pro. Further, we are licensed to use the
registered trademarks and servicemarks Auto Value and Parts Master owned by The
Alliance (formerly Auto Value Associates) in connection with our marketing
program. We believe that our business is not otherwise dependent upon any
patent, trademark, servicemark or copyright.
Regulations
Although subject to various laws and governmental regulations relating to
our business, including those related to the environment, we do not believe that
compliance with such laws and regulations has a material adverse effect on our
operations. Further, we are unaware of any failure to comply with any such laws
and regulations that could have a material adverse effect on our operations. We
can not give any assurance, however, that we will not incur significant expenses
in the future in order to comply with any such law or regulation.
Internet Address and Access to SEC Filings
Our Internet address is www.oreillyauto.com. Interested readers can access
the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, through the Securities and Exchange Commissions website at
www.sec.gov. Such reports are generally available on the day they are filed.
Additionally, the Company will furnish interested readers a paper copy of such
reports, upon request, free of charge.
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 Securities 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, are subject to risks, uncertainties and assumptions,
including, but not limited to, competition, product demand, the market for auto
parts, the economy in general, inflation, consumer debt levels, governmental
approvals, our ability to hire and retain qualified employees, risks associated
with the integration of acquired business, weather, terrorist activities, war
and the threat of war. Actual results may materially differ from anticipated
results described in these 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.
12
<page>
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 ''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 2004 and beyond will be
achieved. For a discussion of our growth strategies, see the "Growth and
Expansion Strategies" section of Item 1 of this Form 10-K.
Acquisitions May Not Lead to Expected Growth
We expect to continue to make acquisitions 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 34% 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.
13
<page>
Dependence Upon Key and Other Personnel
Our success has been largely dependent on the efforts of certain key
personnel, including David O'Reilly, Ted Wise, Greg Henslee and Jim Batten. 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 our Proxy
Statement on Schedule 14A for the 2004 Annual Meeting of Shareholders, a portion
of which is incorporated herein.
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 10%, or 5,255,582 number of shares, of the outstanding shares of
our common stock. As a result, the O'Reilly family, if they act, acting together
represents one of the largest known blocks of our shares and may continue to be
a significant factor in any matter voted on by our shareholders, including the
election of our directors and 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.
Shares Eligible for Future Sale
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.
14
<page>
Item 2. Properties
The following table provides certain information regarding our
administrative offices and distribution centers and offices as of December 31,
2003:
<table>
<caption>
Square
Location Principal Uses(s) Footage Interest
- ------------------ ------------------------------------- --------- ----------
Springfield, MO Distribution Center, Bulk and Return
Facilities and Corporate Offices 330,866 Owned
Springfield, MO Corporate Offices, Training and 33,580 Leased (a)
Technical Center
Springfield, MO Corporate Offices 54,910 Leased (b)
Kansas City, MO Distribution Center and Offices 130,654 Owned
Oklahoma City, OK Distribution Center and Offices 302,540 Owned
Des Moines, IA Distribution Center and Offices 186,716 Owned
Houston, TX Distribution Center and Offices 505,138 Owned
Dallas, TX Distribution Center and Offices 464,265 Owned
Little Rock, AR Distribution Center and Offices 97,052 Leased (c)
Nashville, TN Distribution Center and Offices 381,604 Leased (d)
Knoxville, TN Distribution Center and Offices 163,389 Owned
Mobile, AL Distribution Center and Offices 324,789 Leased (e)
<fn>
(a) Occupied under the terms of a lease expiring in 2007 with an unaffiliated
party, subject to renewal for three five-year terms at our option.
(b) Occupied under the terms of a lease with an unaffiliated party expiring
July 31, 2007, subject to renewal for three three-year terms at our option.
(c) Occupied under the terms of a lease with an unaffiliated party expiring
September 30, 2005, subject to renewal for three five-year terms at our
option.
(d) Occupied under the terms of a two separate leases with an unaffiliated
party with the distribution center lease expiring in December 31, 2008,
subject to renewal of two five-year options. The office space lease expires
December 14, 2008, subject to renewal of two five year options.
(e) Occupied under the terms of a lease with an unaffiliated party expiring
December 31, 2012, subject to renewal for ten five-year terms at our
option.
</fn>
</table>
Of the 1,109 stores that we operated at December 31, 2003, 375 stores were
owned, 664 stores were leased from unaffiliated parties and 70 stores were
leased from one of three entities owned 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 expenses, and an original term of 10
years, subject to one or more renewals at our option. We have entered into
separate master lease agreements with each of the affiliated entities for the
occupancy of the stores covered thereby. Such master lease agreements expire on
December 31, 2004. We believe that the lease agreements with the entities are on
terms comparable to those obtainable from third parties.
We believe that our present facilities are in good condition, are
adequately insured and together with those under construction, are suitable and
adequate for the conduct of our current operations.
15
<page>
Item 3. Legal Proceedings
The Company is 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 flows of the
Company.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended December 31, 2003.
Item 4A. Executive Officers of the Company
The following paragraphs discuss information about executive officers of
the Company who are not also directors:
Ted F. Wise, age 53, Co-President, has been an O'Reilly team member for 33
years. Mr. Wise's primary areas of responsibilities are Sales, Operations and
Real Estate. He began his O'Reilly career in sales in 1970, was promoted to
store manager in 1973, and became our first district manager in 1977. He
continued his progression through the ranks as Operations Manager, Vice
President, Senior Vice President focusing on Operations and Sales, and Executive
Vice President. In July 1999, he was promoted to President of Sales, Operations
and Real Estate.
Greg L. Henslee, age 43, Co-President, has been an O'Reilly team member for
19 years. Mr. Henslee's primary areas of responsibilities are Merchandise,
Systems and Distributions. His O'Reilly career started as a Parts Specialist,
and during his first five years he served in several positions in retail store
operations, including District Manager. From there he advanced to Computer
Operations Manager, and over the past ten years, he has served as Director of
Computer Operations/Loss Prevention, Vice President of Store Operations and as
Senior Vice President. He has been in his current position as President of
Merchandise, Distribution, Information Systems and Loss Prevention since July
1999.
James R. Batten, CPA, age 41, Executive Vice President of Finance, Chief
Financial Officer and Treasurer has been an O'Reilly team member for 11 years.
Mr. Batten's primary areas of responsibility are Accounting and Finance. His
O'Reilly career started as Finance Manager in January 1993 where he served until
being promoted to Chief Financial Officer in March 1994. Prior to joining us in
January 1993, Mr. Batten was employed by the accounting firms of Whitlock, Selim
& Keehn, from 1986 to 1993 and Deloitte, Haskins & Sells from 1984 until 1986.
16
<page>
PART II
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters
Common Stock Market Prices and Dividend Information on page 56 of the
Annual Shareholders' Report for the year ended December 31, 2003, under the
captions, "Market Prices and Dividend Information" and "Number of Shareholders,"
are incorporated herein by reference.
Item 6. Selected Financial Data
Selected Financial Data on pages 26 and 27 of the Annual Shareholders'
Report for the year ended December 31, 2003, under the caption "Selected
Consolidated Financial Data," is incorporated herein by reference.
Item 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 on pages 28 through 35 of the Annual Shareholders' Report for the
year ended December 31, 2003, under the caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," is incorporated
herein by reference.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
At December 31, 2003, we had floating rate obligations totaling
approximately $20.0 million for amounts outstanding under our revolving line of
credit and long-term debt. These floating rate obligations expose us to the risk
of increased interest expense in the event of increases in short-term rates. If
the floating interest rate were to increase by 100 basis points (or 1%) from
December 31, 2003 levels, our interest expense would increase by a total of
approximately $16,667 per month.
Item 8. Financial Statements And Supplementary Data
The Company's consolidated financial statements, the notes thereto and the
report of Ernst & Young LLP, independent auditors, on pages 36 through 52 of the
Annual Shareholders' Report for the year ended December 31, 2003, under the
captions, "Consolidated Financial Statements," "Notes to Consolidated Financial
Statements" and "Report of Independent Auditors," are incorporated herein by
reference.
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
Item 9A. Disclosure and Internal Control
The Company's management, under the supervision and with the participation
of our chief executive officer and chief financial officer, have reviewed and
evaluated the effectiveness of the Company's disclosure controls and procedures
as of December 31, 2003. Based on such review and evaluation, our chief
executive officer and chief financial officer have concluded that the disclosure
controls and procedures were effective as of December 31, 2003, to ensure that
the information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended, (a) is
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms and (b) is accumulated and communicated to the
Company's management, including the officers, as appropriate to allow timely
decisions regarding required disclosure. There were no material changes in the
Company's internal control over financial reporting during the fourth quarter of
2003 that have materially affected or are reasonably likely to materially affect
the Company's internal controls over financial reporting.
17
<page>
PART III
Item 10. Directors And Executive Officers Of The Registrant
The information regarding the directors of the Company contained in the
Company's Proxy Statement on Schedule 14A for the 2004 Annual Meeting of
Shareholders (the Proxy Statement) under the caption "Proposal 1-Election of
Class II Directors" is incorporated herein by 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 Company has adopted a code of ethics that applies to all of its
directors, officers (including its chief executive officer, chief financial
officer, chief accounting officer, controller and any person performing similar
functions) and employees. The Company has filed a copy of this Code of Ethics as
an exhibit to this Form 10-K. The Company has also made the Code of Ethics
available on its website at www.oreillyauto.com.
The Company's Board of Directors has determined that Mr. Murphy, Chairman
of the Audit Committee, is a financial expert and independent, under the
standards of Rule 10A-3 and that Mr. Murphy qualifies as an audit committee
financial expert under Item 401(h)(2) of Regulation S-K and is presumed to
satisfy The Nasdaq Marketplace Rule 4350(d)(2) requirements.
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 included in the Company's Proxy Statement under the caption
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" is
incorporated herein by reference.
Item 11. Executive Compensation
The material in the Proxy Statement under the caption "Executive
Compensation", other than the material under the captions "Compensation
Committee Report", "Audit Committee Report" and "Performance Graph" is
incorporated herein by reference.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Information regarding equity compensation plans of the Company in the Proxy
Statement under the caption "Securities Authorized for Issuance Under Equity
Compensation Plans" is incorporated herein by reference. The material in the
Proxy Statement under the caption "Security Ownership of Management and Certain
Beneficial Owners" is incorporated herein by reference.
Item 13. Certain Relationships And Related Transactions
The material in the Proxy Statement under the caption "Transactions with
Insiders and Others" is incorporated herein by reference.
19
<page>
Item 14. Principal Accountant Fees and Services
The material in the Proxy Statement under the caption "Fees Paid to
Independent Auditors" is incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedule And Reports On Form 8-K
(a) 1. Financial Statements-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statements of O'Reilly Automotive,
Inc. and Subsidiaries included in the Annual Shareholders' Report of the
registrant for the year ended December 31, 2003, are incorporated herein by
reference in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 2003, and 2002 (page
36)
Consolidated Statements of Income for the years ended December 31,
2003, 2002, and 2001 (page 37)
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2003, 2002, and 2001 (page 38)
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002, and 2001 (page 39)
Notes to Consolidated Financial Statements for the years ended
December 31, 2003, 2002, and 2001 (pages 40-51)
Report of Independent Auditors (page 52)
(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 15(d):
Schedule II-Valuation and qualifying accounts
All other schedules for which provision is made in the applicable
accounting regulations 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 is identified in the Exhibit Index.
20
<page>
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated April 24, 2003, that
contained financial results for the quarter ended March 31, 2003.
The Company filed a Current Report on Form 8-K dated October 31, 2003, that
contained financial results for the quarter ended September 30, 2003.
The Company filed a Current Report on Form 8-K dated November 12, 2003,
that contained a press release stating that the Company's Board of
Directors had approved and adopted an amendment to the Amended and Restated
Bylaws of the Company.
The Company filed a Current Report on Form 8-K dated November 19, 2003,
that contained a press release stating that the Company planed to make a
presentation at the Morgan Stanley First Annual Small Cap Executive
Conference in Scottsdale, Arizona.
The Company filed a Current Report on Form 8-K dated December 24, 2003,
that contained a press release announcing that John Murphy and Ronald
Rashkow had been appointed to the Company's Board of Directors effective
December 19, 2003.
(c) Exhibits
See Exhibit Index on page E-1.
21
<page>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
<table>
Col. A Col. B Col. C Col. D Col. E
- --------------------------------- ------------- --------------------------------- ---------------- -------------
Additions -
Description Balance at Additions - Charged to Deductions - Balance at
Beginning Charged to Other Describe End of
of Period Costs and Accounts - Period
Expenses Describe
- --------------------------------- ------------- -------------- --------------- ---------------- -------------
(Amounts in thousands)
Year ended December 31, 2003:
Deducted from asset account:
Allowance for doubtful
accounts $ 865 $ 2,319 $ -- $ 2,198(1) $ 986
Year ended December 31, 2002:
Deducted from asset account:
Allowance for doubtful
accounts $ 1,760 $ 1,633 $ -- $ 2,528(1) $ 865
Year ended December 31, 2001:
Deducted from asset account:
Allowance for doubtful
Accounts $ 135 $ 2,635 $ 1,386(2) $ 2,396(1) $ 1,760
<fn>
(1) Uncollectible accounts written off.
(2) Reserves assumed upon acquisition of Mid-State.
</fn>
</table>
22
<page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
O'REILLY AUTOMOTIVE, INC.
(Registrant)
Date: March 12, 2004
By /s/ David E. O'Reilly
-----------------------------------------
David E. O'Reilly
Co-Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<table>
Signature Title Date
- ----------------------------------- ---------------------------------------------- ----------------
Director, Co-Chairman of the Board and Chief March 12, 2004
/s/David E. O'Reilly Executive Officer (principal executive officer)
- -----------------------------------
David E. O'Reilly
/s/Lawrence P. O'Reilly Director and Co-Chairman of the Board March 12, 2004
- -----------------------------------
Lawrence P. O'Reilly
/s/Charles H. O'Reilly, Jr. Director and Vice-Chairman of the Board March 12, 2004
- -----------------------------------
Charles H. O'Reilly, Jr.
/s/Rosalie O'Reilly-Wooten Director March 12, 2004
- -----------------------------------
Rosalie O'Reilly Wooten
/s/Ted F. Wise Co-President March 12, 2004
- -----------------------------------
Ted F. Wise
/s/Greg Henslee Co-President March 12, 2004
- -----------------------------------
Greg Henslee
Executive Vice-President of Finance March 12, 2004
/s/James R. Batten Chief Financial Officer and Treasurer
- ----------------------------------- (principal financial officer)
James R. Batten
/s/ Jay D. Burchfield Director March 12, 2004
- -----------------------------------
Jay D. Burchfield
/s/ Joe C. Greene Director March 12, 2004
- -----------------------------------
Joe C. Greene
/s/ Paul R. Lederer
- ----------------------------------- Director March 12, 2004
Paul R. Lederer
/s/ John Murphy
- ----------------------------------- Director March 12, 2004
John Murphy
23
<page>
/s/ Ronald Rashkow Director March 12, 2004
- -----------------------------------
Ronald Rashkow
</table>
24
<page>
EXHIBIT INDEX
<table>
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, are incorporated herein by this
reference.
3.1* Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
3.3 Amendment to the Restated Articles of Incorporation of the Registrant,
filed as Exhibit 3.3 to the Registrant's quarterly report on Form 10-Q for
the quarter ended September 30,1999, are incorporated herein by this
reference.
4.1* Form of Stock Certificate for Common Stock.
4.2 Rights Agreement, dated as of May 7, 2002, between O'Reilly Automotive,
Inc. and UMB Bank, N.A., as Rights Agent, including the form of Certificate
of Designation, Preferences and Rights as Exhibit A, the form of Rights
Certificates as Exhibit B and the Summary of Rights as Exhibit C, filed as
Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated May 8,
2002, is incorporated herein by this reference.
10.1*(a) 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 (a) 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, is
incorporated herein by this reference.
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, is 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.
</table>
Page E-1
25
<page>
<table>
EXHIBIT INDEX (continued)
Exhibit
No. Description
- ----- -------------------------------------------------------------------------
10.12* Form of Assignment, Assumption and Indemnification Agreement between
Greene County Realty and Shamrock Properties, Inc.
10.13Loan 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, are
incorporated here by this reference.
10.14Lease 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, is incorporated here by this reference.
10.15(a) 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, is
incorporated herein by this reference.
10.16O'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, is incorporated herein by this reference.
10.17(a) 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, is incorporated herein by this
reference.
10.18Credit 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, is
incorporated herein by this reference.
10.19Credit 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, is incorporated
herein by this reference.
10.20(a) 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, is incorporated herein
by this reference.
10.21(a) 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, is incorporated
herein by this reference.
10.22(a) 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, is incorporated herein by this reference.
10.23Trust 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, is incorporated herein by this reference.
</table>
Page E-2
26
<page>
EXHIBIT INDEX (continued)
<table>
Exhibit
No. Description
- ------ -----------------------------------------------------------------------
10.24(a) 2001 Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan,
dated May 8, 2001, filed herewith.
10.25Note Purchase Agreement, filed as Exhibit 10.25 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, is
incorporated herein by this reference.
10.26(a) First Amendment to Retirement Agreement, dated February 7, 2001, filed
on Exhibit 10.26 to the Registrant's Annual Shareholders' Report on Form
10-K for the year ended December 31, 2001, is incorporated herein by this
reference.
10.27(a) Fourth Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, dated February 7, 2001, filed on Exhibit 10.27 to the Registrant's
Annual Shareholders' Report on Form 10-K for the year ended December 31,
2001, is incorporated herein by this reference.
10.28Credit Agreement between Registrant and Wells Fargo Bank, N.A., dated July
29, 2002 filed as Exhibit 10.28 to the Registrant's Quarterly Report on
From 10-Q for the quarter ended June 30, 2002, is incorporated herein by
this reference.
10.29(a) O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan, filed
herewith.
10.30(a) O'Reilly Automotive, Inc. 2003 Director Stock Option Plan, filed
herewith.
10.31 O'Reilly Automotive, Inc. Corporate Governance/Nominating Committee
Charter, filed herewith.
10.32 O'Reilly Automotive, Inc. Audit Committee Charter, filed herewith.
10.33 O'Reilly Automotive, Inc. Compensation Committee Charter, filed herewith.
10.34 O'Reilly Automotive, Inc. Code of Business Conduct and Ethics, filed
herewith.
13.1 Portions of the 2003 Annual Report to Shareholders, filed herewith.
21.1 Subsidiaries of the Registrant, filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors, filed herewith.
31.1 Certificate of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certificate of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith.
32.1 Certificate of the Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
32.2 Certificate of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
</table>
- --------------------
* Previously filed as Exhibit of same number to the Registration Statement of
the Registrant on Form S-1, File No. 33-58948, and incorporated here by
this reference.
27
<page>
(a) Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
Page E-3
28
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan
O'REILLY AUTOMOTIVE, INC.
2003 EMPLOYEE STOCK OPTION PLAN
I. Purpose of the Plan.
The O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan (the "Plan")
is intended to provide a means whereby certain key employees of O'Reilly
Automotive, Inc., a Missouri corporation (the "Company"), may develop a sense of
proprietorship and personal involvement in the development and financial success
of the Company and its subsidiaries, and to encourage them to remain with and
devote their best efforts to the business of the Company and its subsidiaries,
thereby advancing the interests of the Company and its shareholders.
Accordingly, the Company may make awards to certain employees in the form of
stock options ("Options") with respect to shares of the Company's common stock,
par value $0.01 per share (the "Stock"). Options may either be nonqualified
stock options ("Nonqualified Options") or options ("Incentive Stock Options")
that are intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
II. Administration.
(a) Committee Composition. The Plan shall be administered by a committee
of the Board of Directors of the Company (the "Board") consisting of
not less than two members of the Board as the Board may appoint (the
"Committee"). The members of the Committee shall be "Non-Employee
Directors" within the meaning of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Act"), and "outside
directors" as defined under Section 162(m) of the Code; provided,
however, that noncompliance with such qualifications shall not
invalidate any grants of Options by the Committee. Committee members
may resign at any time by delivering written notice to the Board.
Vacancies in the Committee, however caused, shall be filled by the
Board. The Committee shall act by a majority of its members in office
and the Committee may act either by vote at a telephonic or other
meeting or by a consent or other written instrument signed by all of
the members of the Committee. If the Committee does not exist, or for
any other reason determined by the Board, the Board mat take any
action under the Plan that would otherwise be the responsibility of
the Committee.
(b) Committee Authority. The Committee shall have the sole authority to:
(i) determine the terms and provisions of the Option agreements (the
"Agreements") entered into under the Plan; (ii) prepare and
distribute, in such manner as the Committee determines to be
appropriate, information about the Plan; and (iii) make all other
determinations deemed necessary or advisable for the administration of
the Plan. The Committee may vary the terms and provisions of the
individual Agreements in its discretion. Further, the Committee shall
have authority to grant options and to determine the exercise price of
the Stock covered by each Option, the terms and duration of each
Option, the key employees to whom, and the times at which, Options
shall be granted, whether the Option shall be a Nonqualified Option or
an Incentive Stock Option and the number of shares to be covered by
each Option. Notwithstanding the foregoing, the Committee shall not
have the authority to make any determination that would be
inconsistent with the requirements, restrictions, prohibitions or
limitations specified in the Plan.
(c) Day-to-Day Administration. The day-to-day administration of the Plan
may be carried out by such officers and employees of the Company as
shall be designated from time to time by the Committee. All expenses
and liabilities incurred by the Committee in connection with the
administration of the Plan shall be borne by the Company. The
Committee may employ attorneys, consultants, accountants, appraisers,
brokers or other persons, and the Committee, the Board, the Company
and the officers and employees of the Company shall be entitled to
rely upon the advice, opinions or valuations of any such persons. The
interpretation and construction by the Committee of any provision of
the Plan and any determination by the Committee under any provision of
the Plan shall be final and conclusive for all purposes. Neither the
Committee nor any member thereof shall be liable for any act,
omission, interpretation, construction or determination made in
connection with the Plan in good faith, and the members of the
Committee shall be entitled to indemnification and reimbursement by
the Company in respect of any claim, loss, damage or expense
(including counsel fees) arising therefrom to the fullest extent
permitted by law. The members of the Committee shall be named as
insureds in connection with any directors and officers liability
insurance coverage that may be in effect from time to time.
29
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee
Stock Option Plan (continued)
III. Shares Subject to the Plan.
The aggregate number of shares that may be issued under the Plan shall not
exceed 4,000,000 shares of Stock plus all shares authorized under the 1993
Employee Stock Option Plan not covered by an option on the date such plan
expires. No more than 1,000,000 shares of Stock may be subject to Options that
are intended to be "performance-based compensation" (as that term is used for
purposes of Section 162(m) of the Code) granted to any one individual during any
calendar year, regardless of when such shares are deliverable. The shares of
Stock issuable under the Plan may consist of authorized but unissued shares of
Stock or previously issued shares of Stock reacquired by the Company. Any of
such shares that remain unsold and that are not subject to outstanding Options
at the termination of the Plan shall cease to be subject to the Plan, but until
termination of the Plan and the expiration of all Options granted under the
Plan, the Company shall at all times make available a sufficient number of
shares to meet the requirements of the Plan and the outstanding Options. If any
Option, in whole or in part, expires or terminates unexercised or is cancelled
or forfeited, the shares theretofore subject to such Option may again be subject
to an Option granted under the Plan. The aggregate number of shares that may be
issued under Options granted under the Plan and any maximums set forth in this
Plan shall be subject to adjustment as provided in Article V hereof. The
issuance of Stock pursuant to the exercise of an Option shall result in a
decrease in the number of shares of Stock that may thereafter be available for
purposes of the Plan by the number of shares as to which the Option is exercised
or cancelled.
IV. Grants of Options.
(a) Type and Number. Options granted under the Plan shall be of such type
(Nonqualified Option or Incentive Stock Option) and for such number of
shares of Stock and subject to such terms and conditions as the
Committee shall designate. The Committee may grant Options at any time
and from time to time through, but not after, May 6, 2013, to any
individual eligible to receive the same. For purposes of the Plan, the
date on which an Option is granted is referred to herein as the "Grant
Date."
(b) Option Agreement. Options granted pursuant to the Plan shall be
evidenced by Agreements that shall comply with and be subject to the
terms and conditions set forth in this Section IV and may contain such
other provisions, consistent with the Plan, as the Committee shall
deem advisable. Each Agreement shall state the total number of shares
of Stock that are subject to the Option. References herein to
"Agreements" shall include, to the extent applicable, any amendments
to such Agreements.
(c) Persons Eligible to Receive Options.
(i) Only key employees of the Company or its subsidiaries shall be
eligible to receive Options under the Plan. In granting Options
to an employee, the Committee shall take into consideration the
contribution the employee has made or may make to the success of
the Company or its subsidiaries and such other considerations as
the Committee shall determine. The Committee shall also have the
authority to consult with and receive recommendations from
officers and other employees of the Company and its subsidiaries
with regard to these matters. In no event shall any employee, his
legal representatives, heirs, legatees, distributees, or
successors have any right to participate in the Plan, except to
such extent, if any, as the Committee shall determine.
(ii) Options may be granted under the Plan from time to time in
substitution for stock options and stock appreciation rights
granted by other corporations (the "Acquired Corporation") to
their employees who become key employees of the Company or of any
of its subsidiaries as a result of a merger or consolidation of
the Acquired Corporation with the Company or any such subsidiary,
or the acquisition by the Company or a subsidiary of all or
substantially all of the assets of the Acquired Corporation or
the acquisition by the Company or a subsidiary of stock of the
Acquired corporation.
(d) Exercise Price.
30
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee
Stock Option Plan (continued)
(i) The exercise price of each share of Stock covered by each Option
("Exercise Price") shall not be less than one hundred percent
(100%) of the Market Value Per Share (as defined below) of the
Stock on the date the Option is granted; provided, however, if
and when an Incentive Stock Option is granted and the employee
receiving the Incentive Stock Option owns or will be considered
to own by reason of Section 424(d) of the Code more than ten
percent (10%) of the total combined voting power of all classes
of stock of the Company (a "10% Shareholder"), the Exercise Price
of the Stock covered by such Incentive Stock Option shall not be
less than one hundred and ten percent (110%) of the Market Value
Per Share of the Stock on the Grant Date of the Incentive Stock
Option.
(ii) "Market Value Per Share" of the Stock shall mean: (A) if the
Stock is not publicly traded, the amount determined by the
Committee on the date of the grant of the Option; (B) if the
Stock is traded only otherwise than on a securities exchange and
is not quoted on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the closing quoted selling
price of the Stock on the date of grant of the Option as quoted
in "pink sheets" published by the National Daily Quotation
Bureau; (C) if the Stock is traded only otherwise than on a
securities exchange and is quoted on NASDAQ, the closing quoted
selling price of the Stock on the date of grant of the Option, as
reported by the Wall Street Journal; or (D) if the Stock is
admitted to trading on a securities exchange, the closing quoted
selling price of the Stock on the date of grant of the Option, as
reported in the Wall Street Journal.
(e) Exercisability of Options.
(i) An Option may be exercisable in installments or otherwise upon
such terms as the Committee shall determine when the Option is
granted. The Committee may fix such waiting and/or vesting
periods, exercise dates or other limitations as it shall deem
appropriate with respect to Options granted under the Plan
including, without limitation, making the exercisability thereof
contingent upon the achievement of specific goals.
Notwithstanding the foregoing, however, in no event shall an
Option, or any portion thereof, be exercisable until at least six
months after the date of grant of such Option.
(ii) The Committee at any time: (A) may accelerate the time at which
any Option granted hereunder is exercisable or otherwise vary the
terms of an Option, notwithstanding the fact that such variance
may cause the Option to be treated as a Nonqualified Option; (B)
in the case of a Nonqualified Option, may permit the
transferability of such Option and may remove any restrictions or
conditions to which a Nonqualified Option is subject; and (C)
subject to the consent of the optionee, may convert an
outstanding Incentive Stock Option to a Nonqualified Option if it
deems such conversion to be in the best interest of the optionee.
(iii)No Option shall be exercisable (and any attempted exercise shall
be deemed null and void) if such exercise would create a right of
recovery for "short-swing profits" under Section 16(b) of the
Act, unless the optionee pays the Company the amount of such
"short-swing profits" at the time of the exercise of the Option.
(iv) To the extent that the aggregate Market Value Per Share
(determined at the Grant Date) of Stock with respect to which
Incentive Stock Options (determined without regard to this
sentence) are exercisable for the first time by any individual
during any calendar year (under all plans of the Company and its
subsidiaries) exceeds One Hundred Thousand Dollars ($100,000),
such excess portion of such Incentive Stock Options shall be
treated as Nonqualified Options (this sentence shall be applied
by taking Incentive Stock Options into account in the order in
which they were granted).
(f) Method of Exercise and Payment of Exercise Price.
(i) Options may be exercised by giving written notice to the Company
stating the number of shares for which the Option is being
exercised, accompanied by payment in full of the Exercise Price
relating to the shares with respect to which the Option is so
exercised.
31
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee
Stock Option Plan (continued)
(ii) The full Exercise Price for the shares with respect to which the
Option is being exercised shall be payable to the Company: (A) in
cash or by check payable and acceptable to the Company; (B)
subject to the approval of the Committee, by tendering to the
Company shares of Stock owned by the optionee having an aggregate
Market Value Per Share as of the date of exercise that is not
greater than the full Exercise Price for the shares with respect
to which the Option is being exercised, provided that such shares
shall have been then owned by the optionee for a period of at
least six months prior to such exercise, and by paying any
remaining amount of the Exercise Price as provided in (A) above;
or (C) subject to the approval of the Committee and to such
instructions as the Committee may specify, at the optionee's
written request the Company may deliver certificates for the
shares of Stock for which the Option is being exercised to a
broker for sale on behalf of the optionee, provided that the
optionee has irrevocably instructed such broker to remit directly
to the Company on the optionee's behalf the full amount of the
Exercise Price from the proceeds of such sale; provided, however,
that in the case of an Incentive Stock Option, (B) and (C) above
shall apply only if Committee approval is given on or prior to
the Grant Date and the Agreement expressly provides for such
optional payment terms. In the event that the optionee elects to
make payment as allowed under clause (B) above, the Committee
may, upon confirming that the optionee owns the number of shares
of Stock being tendered, authorize the issuance of a new
certificate for the number of shares being acquired pursuant to
the exercise of the Option less the number of shares being
tendered upon the exercise and return to the optionee (or not
require surrender of) the certificate for the shares of Stock
being tendered upon the exercise. Payment instruments will be
received subject to collection.
(iii)Notwithstanding any other provision of the Plan, the Company
shall have no liability to deliver any shares of Stock under the
Plan or make any other distribution of benefits under the Plan
unless such delivery or distribution would comply with all
applicable laws (including, without limitation, the requirements
of the Securities Act of 1933, as amended), and the applicable
requirements of any securities exchange, the NASDAQ or similar
entity. If the employee fails to timely accept delivery of and
pay for the shares specified in such notice, the Committee shall
have the right to terminate the Option with respect to such
shares.
(g) Term.
(i) The term of each Option shall be determined by the Committee at
the Grant Date; provided, however, that each Option shall,
notwithstanding anything in the Plan or any Agreement to the
contrary, expire not more than ten years (five years with respect
to an Incentive Stock Option granted to an employee who is a 10%
Shareholder) from the Grant Date or, if earlier, the date
specified in the Agreement.
(ii) In the event an individual's employment with the Company and its
subsidiaries shall terminate for reasons other than: (i)
retirement in accordance with the terms of a retirement plan of
the Company or one of its subsidiaries ("Retirement"); (ii)
permanent disability (as defined in Section 22(e)(3) of the
Code); or (iii) death, the individual's Options shall terminate
as of the date of such termination of employment and shall not be
exercisable to any extent as of and after such time.
(iii)If any termination of employment is due to Retirement or
permanent disability, the individual shall have the right to
exercise any Option at any time within the 12-month period
(three-month period in the case of Retirement for Options that
are Incentive Stock Options) following such termination of
employment, but only to the extent that the Option was
exercisable immediately prior to such termination of employment.
Notwithstanding any other provision contained in the Plan or the
Agreements, if the termination of employment is due to
retirement, and such retiring individual at the time of his or
her retirement (A) is at least fifty-five (55) years of age, and
(B) the sum of the individual's age and years of service to the
Company is equal to or greater than eighty (80) years, then all
outstanding options granted to such retiring individual shall
automatically become immediately exercisable within such 12-month
period (three month period in the case of Options that are
Incentive Stock Options).
(iv) Whether any termination of employment is due to Retirement or
permanent disability and whether an authorized leave of absence
or absence for military or government service or for other
reasons shall constitute a termination of employment for purposes
of the Plan shall be determined by the Committee in its sole
discretion.
32
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee
Stock Option Plan (continued)
(v) If an individual shall die while entitled to exercise an Option,
the individual's estate, personal representative or beneficiary,
as the case may be, shall have the right to exercise the Option
at any time within the 12-month period following the date of the
optionee's death, to the extent that the optionee was entitled to
exercise the same on the day immediately prior to the optionee's
death.
(vi) The right of an individual to exercise an Option shall terminate
to the extent that such Option is exercised.
V. Corporate Transactions and Adjustment.
(a) Effect on Corporate Actions. The existence of the Plan and the Options
granted hereunder shall not affect in any way the right or power of
the Board of Directors or the shareholders of the Company to make or
authorize any adjustment, recapitalization, reorganization or other
change in the Company's capital structure or its business, any merge'
or consolidation of the Company with or into another entity, any
issuance of bonds, debentures, preferred or prior preference stocks
ahead of or affecting the Stock or the rights thereof, the dissolution
or liquidation of the Company or any sale or transfer of all or any
part of its assets or business, or any other corporate act or
proceeding.
(b) Adjustment. The shares with respect to which Options may be granted
are shares of Stock as presently constituted. If, however, the number
of outstanding shares of Stock are increased or decreased, or such
shares are exchanged for a different number or kind of shares or
securities of the Company through reorganization, merger,
recapitalization, reclassification, stock dividend, stock split,
combination of shares or other similar transaction, the aggregate
number of shares of Stock subject to the Plan and any maximums set
forth in Section III hereof, and the shares of Stock subject to issued
and outstanding Options under the Plan shall be appropriately and
proportionately adjusted by the Committee. Any such adjustment in an
outstanding Option shall be made without change in the aggregate
Exercise Price applicable to the unexercised portion of the Option but
with an appropriate adjustment in the price for each share or other
unit of any security covered by the Option.
(c) No Adjustment Upon Issuance of Securities. Except as may otherwise be
expressly provided in the Plan, the issuance by the Company of shares
of capital stock of any class or securities convertible into shares of
capital stock of any class for cash, property, labor or services, upon
direct sale, upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares of capital stock or other securities, and
in any case whether or not for fair value, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number
of shares of Stock available under the Plan or subject to Options
theretofore granted or the Exercise Price per share with respect to
outstanding Options.
(d) Final Determination. Adjustments under this Section shall be made by
the Committee whose determination as to what adjustments shall be
made, and the extent thereof, shall be final, binding and conclusive.
No fractional shares of Stock shall be issued under the Plan or in
connection with any such adjustment.
(e) Automatic Termination of Plan and Options. Notwithstanding anything to
the contrary contained in this Section V, upon: (i) the dissolution or
liquidation of the Company, (ii) a reorganization, merger or
consolidation of the Company with one or more corporations in which
the Company is not the surviving corporation, or (iii) a sale of
substantially all of the assets of the Company, the Plan shall
terminate, and any outstanding Options granted under the Plan shall
terminate on the day before the consummation of the transaction;
provided that the Committee shall have the right, but not the
obligation, to accelerate the time in which any Options may be
exercised prior to such a termination. However, the termination of
such Options shall not occur if provision is made in writing in
connection with the transaction, in a manner acceptable to the
Committee, for: (A) the continuance of the Plan and assumption of
outstanding Options, (B) the substitution for such Options of new
options to purchase the stock of a successor corporation (or parent or
subsidiary thereof), with appropriate adjustments as to number and
kind of shares and option price or (C) other treatment of the Options
acceptable to the Committee. The Committee shall have the authority to
amend this paragraph to provide for a requirement that a successor
corporation assume any outstanding Options.
33
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee
Stock Option Plan (continued)
VI. Term of Plan.
No Option shall be granted pursuant to the Plan after ten (10) years from the
earlier of the date of adoption of the Plan by the Board of the Company or the
date of approval by the Company's shareholders. Notwithstanding the foregoing,
if a longer term is permitted with respect to the duration of an incentive stock
option plan under law, the Board may extend the term of this Plan to a term not
to exceed the longest term permitted with respect to an incentive stock option
plan.
VII. Amendment and Termination of Plan.
(a) Authority to Amend and Terminate. The Board may, from time to time,
with respect to any shares at the time not subject to Options, suspend
or terminate the Plan or amend or revise the terms of the Plan;
provided that any amendment to the Plan shall be approved by a
majority of the shareholders of the Company if the amendment would (i)
materially increase or decrease the benefits accruing to participants
under the Plan; (ii) increase or decrease the number of shares of
Stock which may be issued under the Plan, except as permitted under
the provisions of Section V above; or (iii) materially modify the
requirements as to eligibility for participation in the Plan.
(b) Consent of Optionholder Required. Subject to the provisions in Section
V above, no amendment, suspension or termination of this Plan shall,
without the consent of the optionee, alter or impair any rights or
obligations under any Option granted to such optionee under the Plan.
VIII. Effective Date of Plan.
The Plan shall become effective upon adoption by the Board and approval by the
Company's shareholders; provided, however, that prior to approval of the Plan by
the Company's shareholders but after adoption by the Board, Options may be
granted under the Plan subject to obtaining such approval.
IX. Preemption by Applicable Laws and Regulations.
Anything in the Plan or any Agreement entered into pursuant to the Plan to the
contrary notwithstanding, if, at any time specified herein or therein for the
making of any determination with respect to the issuance or other distribution
of shares of Stock, any law, regulation or requirement of any governmental
authority having jurisdiction in the premises shall require either the Company
or the optionee (or the optionee's beneficiary), as the case may be, to take
any'action in connection with any such determination, the issuance or
distribution of such shares or the making of such determination shall be
deferred until such action shall have been taken.
X. Miscellaneous.
(a) Taxes and Withholding. All distributions under the Plan are subject to
withholding of all applicable taxes, and the Committee may condition
the delivery of any shares or other benefits under the Plan on
satisfaction of the applicable withholding obligations. The Committee,
in its discretion, and subject to such requirements as the Committee
may impose prior to the occurrence of such withholding, may permit
such withholding obligations to be satisfied through cash payment by
the optionee, through the surrender of shares of Stock that the
optionee already owns, or through the surrender of shares of Stock to
which the optionee is otherwise entitled under the Plan.
(b) No Employment Contract. Nothing contained in the Plan shall be
construed as conferring upon any optionee the right to continue in the
employ of the Company or any of its subsidiaries.
(c) Employment with Subsidiaries. Employment by the Company for the
purpose of this Plan shall be deemed to include employment by, and to
continue during any period in which an employee is in the employment
of, any subsidiary.
34
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee
Stock Option Plan (continued)
(d) No Rights as a Shareholder. An optionee shall have no rights as a
shareholder with respect to shares covered by such optionee's Option
until the date of the issuance of shares to the optionee upon the
optionee's exercise of the Option. No adjustment will be made for
dividends or other distributions or rights for which the record date
is prior to the date of such issuance.
(e) No Right to Corporate Assets. Nothing contained in the Plan shall be
construed as giving any optionee, such optionee's beneficiaries or any
other person any equity or other interest of any kind in any assets of
the Company or any subsidiary or creating a trust of any kind or a
fiduciary relationship of any kind between the Company or any
subsidiary and any such person. Any optionee shall have only a
contractual right to shares of Stock as set forth in the Agreement,
unsecured by any assets of the Company or any subsidiary, and nothing
contained in the Plan shall constitute a guarantee that the assets of
the Company or any subsidiary shall be sufficient to pay any benefits
to any person.
(f) No Restriction on Corporate Action. Nothing contained in the Plan
shall be construed to prevent the Company or any subsidiary from
taking any corporate action that is deemed by the Company or such
subsidiary to be appropriate or in its best interests, whether or not
such action would have an adverse effect on the Plan or any Option
made under the Plan. No optionee, beneficiary or other person shall
have any claim against the Company or any subsidiary as a result of
any such action.
(g) Limitations on Transfer. Except as designated by the optionee by will
or by the laws of descent and distribution, neither an optionee nor an
optionee's beneficiary shall have the power or right to sell,
exchange, pledge, transfer, assign or otherwise encumber or dispose of
such optionee's or beneficiary's interest arising under the Plan or
any Option received under the Plan, nor shall such interest be subject
to seizure for the payment of an Optionee's or beneficiary's debts,
judgments, alimony, or separate maintenance or be transferable by
operation of law in the event of an optionee's or beneficiary's
bankruptcy or insolvency and to the extent any such interest arising
under the Plan or an Option received under the Plan is awarded to a
spouse pursuant to any divorce proceeding, such interest shall be
deemed to be terminated and forfeited notwithstanding any vesting
provisions or other terms herein or in the agreement evidencing such
Option.
(h) Application of Funds. The proceeds received by the Company from the
sale of shares of Stock pursuant to the Plan shall be used for general
corporate purposes.
(i) Elections in Writing. Unless otherwise specified herein, each election
required or permitted to be made by any optionee or other person
entitled to benefits under the Plan, and any permitted modification,
or revocation thereof, shall be in writing at such times, in such
form, and subject to such restrictions and limitations, not
inconsistent with the terms of the Plan, as the Committee shall
require.
(j) Governing Law; Construction. All rights and obligations under the Plan
shall be governed by, and the Plan shall be construed in accordance
with, the laws of the State of Missouri without regard to the
principles of conflicts of laws. Titles and headings to Sections
herein are for purposes of reference only, and shall in no way limit,
define or otherwise affect the meaning or interpretation of any
provisions of the Plan.
35
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director
Stock Option Plan
O'REILLY AUTOMOTIVE, INC.
2003 DIRECTOR STOCK OPTION PLAN
I. Establishment and Purpose.
O'Reilly Automotive, Inc. hereby establishes a stock option plan to be named the
2003 O'Reilly Automotive, Inc. Director Stock Option Plan. The purpose of the
Plan is to provide (a) further inducement to qualified persons to become and
remain Eligible Directors of the Company, and (b) additional incentive to
Eligible Directors of the Company by encouraging them to acquire shares of Stock
upon the exercise of Options granted hereunder in return for services rendered
by them to the Company, thereby increasing such Eligible Directors' proprietary
interest in the business of the Company; thereby furthering the interest of the
Company and its shareholders.
II. Definitions.
(a) "Act" means the Securities and Exchange Act of 1934, as amended from
time to time.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time.
(d) "Committee" means the Committee of the Board consisting of not less
than two members of the Board as the Board may appoint.
(e) "Company" means O'Reilly Automotive, Inc., a corporation organized and
existing under the laws of the State of Missouri.
(f) "Eligible Director" means a director of the Company who is not
otherwise an officer or employee of the Company or of any subsidiary
thereof.
(g) "Fair Market Value" of the Stock shall mean: (A) if the Stock is not
publicly traded, the amount determined by the Committee on the date of
the grant of the Option; (B) if the Stock is not traded on a
securities exchange and not quoted on the NASDAQ, the closing quoted
selling price of the Stock on the date of grant of the Option as
quoted in "pink sheets" published by the National Daily Quotation
Bureau; (C) if the Stock is not traded on a securities exchange but is
quoted on the NASDAQ, the closing quoted selling price of the Stock on
the date of grant of the Option, as reported by the Wall Street
Journal; or (D) if the Stock is admitted to trading on a securities
exchange, the closing quoted selling price of the Stock on the date of
grant of the Option, as reported in the Wall Street Journal.
(h) "Option" means an option granted under this Plan to acquire Stock.
(i) "Optionee" means the person to whom an Option is granted.
(j) "Option Agreement" means an agreement issued to each Eligible Director
with respect to each Option.
(k) "Option Date" means the date as of which an Option is granted, which
shall be the first business day after the annual meeting of
Shareholders of the Company.
(l) "NASDAQ" means the National Association of Securities Dealers
Automated Quotation System.
(m) "Plan" means the 2003 O'Reilly Automotive, Inc. Director Stock Option
Plan.
36
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director
Stock Option Plan (continued)
(n) "Post-Death Representative(s)" means the executor(s) or
administrator(s) of the Optionee's estate or the person or persons to
whom the Optionee's rights under his or her Option pass by the
Optionee's will or the laws of the descent and distribution.
(o) "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Act, as amended from time to time, or
any successor rule.
(p) "Stock" means authorized and unissued shares of $0.01 per value common
stock of the Company or reacquired shares of such common stock held in
its treasury.
III. Administration.
(a) The Plan shall be administered by the Committee. The members of the
Committee shall be "Non-Employee Directors" within the meaning of Rule
16b-3 Act, provided, however, that noncompliance with such
qualifications shall not invalidate any grants of Options by the
Committee. Committee members may resign at any time by delivering
written notice to the Board. Vacancies in the Committee, however
caused, shall be filled by the Board. The Committee shall act by a
majority of its members in office and the Committee may act either by
vote at a telephonic or other meeting or by a consent or other written
instrument signed by all of the members of the Committee. If the
Committee does not exist, or for any other reason determined by the
Board, the Board mat take any action under the Plan that would
otherwise be the responsibility of the Committee.
(b) Subject to and not inconsistent with the express provisions of the
Plan, the Committee has and may exercise such powers and authority of
the Board as may be necessary or appropriate for the Committee to
carry out its functions under the Plan. Without limiting the
generality of the foregoing, the Committee shall have full power and
authority (i) to determine all questions of fact that may arise under
the Plan, (ii) to interpret the Plan and to make all other
determinations necessary or advisable for the administration of the
Plan and (iii) to prescribe, amend and rescind rules and regulations
relating to the Plan, including, without limitation, any rules that
the Committee determines are necessary or appropriate to ensure that
the Company and the Plan will be able to comply with all applicable
provisions of any applicable federal, state or local law. All
interpretations, determinations and actions by the Committee will be
final and binding upon all persons, including the Company, Eligible
Directors and Optionees.
IV. Shares Subject to the Plan.
(a) Subject to the provisions of Section 10 hereof, the Stock which may be
issued pursuant to the exercise of Options granted under the Plan
shall not exceed in the aggregate 200,000 shares of Stock, plus all
shares authorized under the 1993 Director Stock Option Plan not
covered by an option on the date such plan expires.
(b) At any time during the existence of the Plan, there shall be reserved
for issuance upon the exercise of Options granted under the Plan an
amount of Stock (subject to adjustment as provided in Section 10
hereof) equal to the total number of share then issuable pursuant to
all such Option grants which shall have been made prior to such time.
The Company in its discretion may use reacquired shares held in the
treasury in lieu of authorized but unissued shares.
(c) If an Option terminates, in whole or in part, by expiration or for any
other reason except exercise of such Option, the shares previously
reserved for issuance upon grant of the Option shall again be
available for issuance as if such shares had never been subject to an
Option.
37
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director
Stock Option Plan (continued)
V. Granting of Options.
(a) Each person who is an Eligible Director on the Option Date shall
receive Options to acquire 10,000 shares of Stock at a per share
purchase price equal to the per share Fair Market Value of the Stock
on the Option Date, provided, however, that no grant shall be made to
any Eligible Director who is first elected a director of the Company
at the annual meeting of the shareholders immediately preceding the
Board meeting on the Option Date.
(b) Each Eligible Director may also be granted Options from time to time
upon approval by the full Board.
(c) All Options granted under the Plan shall be granted as of an Option
Date. Promptly after each Option Date, the Company shall notify the
Optionee of the grant of the Option, and shall hand deliver or mail to
the Optionee an Option Agreement, duly executed by and on behalf of
the Company, with the request that the Optionee execute and return the
Option Agreement within thirty days after the Option Date. If the
Optionee shall fail to execute and return the written Option Agreement
within said thirty-day period, his or her Option shall be
automatically terminated, except that if the Optionee dies within said
thirty-day period, such Option Agreement shall be effective
notwithstanding the fact that it has not been signed prior to death.
(d) Options granted under the Plan will not be incentive stock options
within the meaning of Section 422 of the Code.
VI. Terms of Options.
Notwithstanding any other provision of the Plan, each Option shall be evidenced
by an Option Agreement, which shall include the substance of the following terms
and conditions:
(a) The option price for each share of Stock covered by an Option shall be
an amount equal to 100% of the Fair Market Value of a share of Stock
on the Option Date of such Option.
(b) The Option by its terms shall not be transferable by the Optionee
otherwise than by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the
Code or regulations thereunder. The designation of a beneficiary does
not constitute a transfer. The Option shall be exercisable, during the
Optionee's lifetime, only by the Optionee.
(c) The Option by its terms shall be immediately exercisable as to any or
all shares and may be exercised at any time and from time to time.
(d) Each Option granted under the Plan and all unexercised rights
thereunder shall expire automatically upon the earlier of (i) the date
on which an Optionee ceases to hold office as a director of the
Company for any reason other than retirement, death or disability,
(ii) the date that is three months following the effective date of the
Optionee's retirement from service on the Board, (iii) the date that
is one year following the date on which the Optionee's service on the
Board of Directors of the Company ceases due to death or disability,
and (iv) the seventh anniversary date of the Option date.
VII. No Right to Remain a Director.
The grant of an Option shall not create any right in any person to remain as a
director of the Company.
38
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director
Stock Option Plan (continued)
VIII. Exercise of Options.
(a) An Option may be exercised in whole or in part except as otherwise may
be provided in the Option Agreement, by giving written notice to the
Company stating the number of shares of Stock for which the Option is
being exercised, accompanied by payment in full of the aggregate
purchase price for the shares of Stock being purchased. Payment of the
aggregate purchase price for the shares of Stock may be made (i) in
cash or by check payable and acceptable to the Company for the full
amount of the purchase price of the shares with respect to which the
Option is exercised, (ii) subject to the approval of the Committee,
upon delivery to the Company on the exercise date of certificates
representing shares of Stock, owned by the Optionee for longer than
six months and registered in the Optionee's name, having a Fair Market
Value on the date of such exercise and delivery equal to the full
amount of the purchase price of the shares with respect to which the
Option is exercised, (iii) at the Optionee's written request and
subject to the approval of the Committee and to such instructions as
the Committee may specify, in accordance with a cashless exercise
program pursuant to which the Company may deliver certificates for the
shares of Stock for which the Option is being exercised to a broker
for sale on behalf of the Optionee, provided that the Optionee has
irrevocably instructed such broker to remit directly to the Company on
the Optionee's behalf the full amount of such purchase price from the
proceeds of such sale, or (iv) a combination of (i) and (ii) that
collectively equals the full amount of the purchase price of the
shares with respect to which the Option is exercised.
(b) An Optionee shall have none of the rights of a shareholder with
respect to shares of Stock subject to his or her Option until shares
of Stock are issued to him or her upon the exercise of his or her
Option.
IX. General Provisions.
The Company shall not be required to issue or deliver any certificate for shares
of Stock to an Optionee upon the exercise of his or her Option:
(a) Prior to (i) if requested by the Company, the filing with the Company
by the Optionee or the Optionee's Post-Death Representative of a
representation in writing that at the time of such exercise that it is
his or her then present intention to acquire the shares of Stock being
purchased for investment and not for resale, and/or (ii) the
completion of any registration or other qualification of such shares
of Stock under any state or federal securities laws or rulings or
regulations of any governmental regulatory body which the Company
shall determine to be necessary or advisable; and
(b) Unless such issuance or delivery would comply with all applicable laws
and the applicable requirements of any securities exchange, the NASDAQ
or similar entity.
X. Adjustment Provisions.
(a) The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the shareholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or
its business, any merger or consolidation of the Company with or into
another entity, any issuance of bonds, debentures, preferred or prior
preference stocks ahead of or affecting the Stock or the rights
thereof, the dissolution or liquidation of the Company for any sale or
transfer of all or any part of its assets or business, or any other
corporate act or proceeding.
39
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director
Stock Option Plan (continued)
(b) The shares with respect to which Options may be granted are shares of
Stock as presently constituted. If, however, the number of outstanding
shares of Stock are increased or decreased, or such shares are
exchanged for a different number or kind of shares or securities of
the Company through a reorganization, merger, recapitalization,
reclassification, stock dividend, stock split, number of shares of
Stock subject to the Plan as provided in Section 4 hereof, and the
shares of Stock subject to issuance under outstanding Options under
the Plan shall be appropriately and proportionately adjusted by the
Committee. Any such adjustment in an outstanding Option shall be made
without change in the aggregate purchase price applicable to the
unexercised portion of the Option but with an appropriate adjustment
in the price for each share or other unit of any security covered by
the Option.
(c) Except as may otherwise be expressly provided in the Plan, the
issuance by the Company of shares of capital stock of any class or
securities convertible into shares of capital stock of any class for
cash, property, labor or services, upon direct sale, upon the exercise
of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares of
capital stock or other securities, and in any case such shares of
capital stock or other securities, and in any case whether or not for
fair value, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number of shares of Stock available
under the Plan or subject to Options theretofore granted or the
purchase price per share with respect to outstanding Options.
(d) Adjustments under this Section 10 be made by the Committee whose
determination as to what adjustments shall be made, and the extent
thereof, shall be final, binding and conclusive. No fractional shares
of Stock shall be issued under the Plan or in connection with any such
adjustment.
(e) Notwithstanding anything to the contrary contained in this Section 10,
upon: (i) the dissolution or liquidation of the Company, (ii) a
reorganization, merger or consolidation of the Company with one or
more corporations in which the Company is not the surviving
corporation, or (iii) a sale of substantially all of the assets of the
Company, the Plan shall terminate, and any outstanding Options granted
under the Plan shall terminate on the day before the consummation of
the transaction; provided that the Committee shall have the right, but
not the obligation, to accelerate the time in which any Options may be
exercised prior to such a termination. However, the termination of
such Options shall not occur if provision is made in writing in
connection with the transaction, in a manner acceptable to the
Committee, for: (A) the continuance of the Plan and assumption of
outstanding Options, (B) the substitution for such Options of new
options to purchase the stock of a successor corporation (or parent or
subsidiary thereof), with appropriate adjustments as to number and
kind of shares and option price, or (C) other treatment of the Options
acceptable to the Committee. The Committee shall have the authority to
amend this paragraph to provide for a requirement that a successor
corporation assume any outstanding Options.
XI. Duration, Amendment and Termination.
(a) The Board may at any time terminate the Plan or make such amendments
thereof as it shall deem advisable and in the best interests of the
Company, without further action on the part of the shareholders of the
Company; provided, however, that no such termination or amendment
shall, without the consent of the Optionee, adversely affect or impair
the rights of such Optionee, and provided further, that no amendment
requiring shareholder approval in order to meet the requirements of
Rule 16b-3 shall be effective unless such shareholder approval is
obtained, and provided, further that the provisions relating to
eligible persons, the amount and price of awards and the timing of
awards may not be amended more than once every six months except to
comport with changes in the Code or the Employee Retirement Income
Security Act of 1974, or the rules thereunder. (b) The period during
which Options may be granted under the Plan shall terminate on May 6,
2013, unless the Plan earlier shall have been terminated as provided
above.
40
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director
Stock Option Plan (continued)
XII. Withholding.
The Company shall have the right to deduct from payments of any kind otherwise
due to the Optionee any federal, state or local taxes of any kind required by
law to be withheld with respect to any shares issued upon exercise of Options
under the Plan.
XIII. Shareholder Approval.
The Plan shall become effective upon adoption by the Board and approval by the
Company's shareholders; provided, however, that prior to approval of the Plan by
the Company's shareholders but after adoption by the Board, Options may be
granted under the Plan subject to obtaining such approval.
41
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.31 - O'Reilly Automotive, Inc. Corporate
Governance/Nominating Committee Charter
O'REILLY AUTOMOTIVE, INC.
CORPORATE GOVERNANCE/NOMINATING COMMITTEE CHARTER
Purpose
The Corporate Governance/Nominating Committee (the "Committee") of O'Reilly
Automotive, Inc. (the "Company") is appointed by, and generally acts on behalf
of, the Board of Directors of the Company (the "Board"). The Board has
determined to establish the governing principles of the Committee through the
adoption of this charter (the "Charter").
The Committee's principal purposes shall be: (1) to establish criteria for the
selection of directors and to recommend to the Board the nominees for director
in connection with the Company's annual meeting of stockholders; (2) to take a
leadership role in shaping the Company's corporate governance policies and to
issue and implement the Corporate Governance Principles of the Company; (3) to
develop and coordinate annual evaluations of the Board, its committees and its
members; and (4) to adhere to all legal standards required by the Securities and
Exchange Commission (the "SEC") and the Nasdaq National Market ("Nasdaq").
Membership and Organization of Committee
The Committee shall be composed of three or more directors. Each member of the
Committee shall meet the independence and experience requirements of the federal
securities laws and the applicable rules and regulations of the SEC and Nasdaq,
as such requirements may change from time to time.
The members of the Committee shall be appointed by the Board. The Board shall
designate one member of the Committee to serve as Chairperson. If the
Chairperson is absent from a meeting, another member of the Committee may act as
Chairperson. Members of the Committee will be appointed for three-year terms and
shall serve until their resignation, retirement, or removal by the Board or
until their successors shall be appointed. The Board may fill vacancies on the
Committee and remove a member of the Committee at any time with or without
cause. No member of the Committee shall be removed except by majority vote of
the independent directors of the Board then in office.
Responsibilities and Duties
The Committee shall:
Nomination of Directors
1. Consider and make recommendations to the Board concerning the appropriate
size and overall characteristics of the Board, including desired
competencies, skills and attributes and the desired ratio of independent
and non-independent directors.
2. Establish criteria for persons to be nominated for election to the Board
and its committees, taking into account the composition of the Board as a
whole. At a minimum, the criteria should include (a) a candidate's
qualification as "independent" under the federal securities laws and the
rules and regulations of the SEC and Nasdaq applicable to the Board and
each of its committees; (b) depth and breadth of experience within the
Company's industry and otherwise; (c) outside time commitments; (d) special
areas of expertise; (e) accounting and finance knowledge; (f) business
judgment; (g) leadership ability; (h) experience in developing and
assessing business strategies; (i) corporate governance expertise; (j) risk
management skills; and (k) for incumbent members of the Board, the past
performance of the incumbent director.
3. Conduct searches for prospective directors based on the foregoing criteria,
review candidates recommended by stockholders, and evaluate and recommend
candidates for election to the Board by the stockholders or to fill
vacancies.
42
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.31 - O'Reilly Automotive, Inc. Corporate
Governance/Nominating Committee Charter (continued)
4. Review on an annual basis and recommend to the Board one member of the
Board to serve as Lead Director.
5. Establish policies for reviewing the continued appropriateness of Board
membership when an individual director changes the position he or she held
when elected or appointed to the Board.
6. Evaluate and make recommendations to the Board concerning the appointment
of directors to Board committees and the selection of committee chairs;
recommendations shall consider suggestions from the Chairman of the Board,
desired characteristics of committee members, specific legal and regulatory
requirements, whether there should be a policy of periodic rotation of
directors among the committees, the number of boards and other committees
on which the directors serve, and whether there should be any limitations
on the number of consecutive years a director should serve on any one
committee.
7. Periodically review the independence of each director.
Corporate Governance Oversight
8. Periodically review and assess the adequacy of the Company's Corporate
Governance Principles and recommend any changes to the Board for its
approval and adoption.
9. Evaluate and recommend to the Board the responsibilities of the Board
committees, including the structure, operations and the authority to
delegate to subcommittees.
10. Assist the Board in its allocation of workload among the various committees
of the Board.
11. Review and reassess the adequacy of the charters of the various committees
of the Board periodically and recommend any proposed changes to the Board
for its approval.
12. Assist the Board with development of responsibilities of directors,
including basic duties and responsibilities with respect to attendance at
board meetings and advance review of meeting materials.
13. Periodically review, consider and recommend to the Board the total
compensation program for all non-employee directors of the Company for
service on the Board and its committees.
14. Oversee the review and update, when appropriate, of the Company's Code of
Business Conduct and Ethics.
15. Review any conflicts of interest or other issues that may arise under the
Company's Code of Business Ethics involving the Company's officers or
members of the Board.
16. Approve all service by senior executive officers on outside boards of
directors.
17. Review and recommend adoption of all director and officer insurance policy
requirements.
Board Evaluation and Development
18. Develop and coordinate an annual evaluation of the full Board, all Board
committees and individual Board members, which evaluations shall be
reported to the whole Board.
19. Establish and maintain an orientation program for new directors.
43
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.31 - O'Reilly Automotive, Inc. Corporate
Governance/Nominating Committee Charter (continued)
20. Develop, or make available, a continuing education program conducted either
internally or externally for all directors.
Other Powers and Responsibilities
21. Make regular reports to the Board, providing an overview of its activities,
summarizing Committee actions and commenting on the fulfillment of the
Committee's duties under this Charter. The Committee shall also present
resolutions to the Board that the Committee has recommended be adopted at
the Board level.
22. Have the authority to retain consultants and other third-party advisors of
its selection as it deems necessary to provide it with advice and counsel,
including a search firm to fulfill its responsibilities of identifying
candidates for Board membership. The Company shall provide appropriate
funding for the Committee to retain such advisors without requiring the
Committee to seek Board approval.
23. Review and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for its approval.
24. Perform any other activities consistent with this Charter, the Company's
Articles of Incorporation, Amended and Restated Bylaws, and governing law,
as the Committee or the Board deems necessary or appropriate.
Conduct of Meetings
The Committee shall meet when, where and as often as it may deem necessary and
appropriate in its judgment, but in no event less than four (4) times per year,
either in person or telephonically. A majority of the members of the Committee
shall constitute a quorum. The Chairman of the Board and Chief Executive
Officer, the Chairman of the Committee, or the Company's Lead Director shall
have the right to call a special meeting of the Committee. The Committee may
request that any directors, officers or employees of the Company, or other
persons whose advice and counsel are sought by the Committee, attend any meeting
to provide such information as the Committee requests.
The Committee shall fix its own rules of procedure, which shall be consistent
with the Amended and Restated Bylaws of the Company and this Charter. A member
of the Committee or the Corporate Secretary shall keep written minutes of
Committee meetings, which minutes shall be maintained with the books and records
of the Company. The Committee may delegate authority to one or more members of
the Committee when appropriate, but no such delegation shall be permitted if the
authority is required by law, regulation or listing standard to be exercised by
the Committee as a whole.
44
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.32 - O'Reilly Automotive, Inc. Audit Committee Charter
O'REILLY AUTOMOTIVE, INC.
AUDIT COMMITTEE CHARTER
Purpose
This Revised Audit Committee Charter (the "Charter") governs the operations of
the Audit Committee of the Board of Directors (the "Audit Committee") of
O'Reilly Automotive, Inc. (the "Company"). The Audit Committee is appointed by
the Board to assist the Board in monitoring (1) the integrity of the financial
statements of the Company, (2) the independent auditor's qualifications and
independence, (3) the performance of the Company's internal audit function and
independent auditors, and (4) the compliance by the Company with legal and
regulatory requirements.
The Audit Committee shall prepare the report required by the rules of the
Securities and Exchange Commission to be included in the Company's annual proxy
statement.
Committee Membership
The Audit Committee shall consist of no fewer than three members. The members of
the Audit Committee shall meet the independence, financial literacy and
expertise and other qualification requirements of the federal securities laws
and the applicable rules and regulations of the Securities and Exchange
Commission and the NASDAQ National Market. In addition, an Audit Committee
member shall not own or control 20% or more of the Company's voting stock and
shall be prohibited from receiving any consulting, advisory or other
compensatory fee from the Company other than payment for Board or committee
service.
The members of the Audit Committee shall be appointed by the Board on the
recommendation of the Corporate Governance/Nominating Committee. Audit Committee
members may be replaced by the Board. Committee Authority and Responsibilities
The Audit Committee shall have the sole authority to appoint or replace the
independent auditor, and shall approve, in advance, all audit engagement fees
and terms and all non-audit engagements with the independent auditors permitted
under applicable law, rules and regulations. In addition, the Audit Committee
shall approve all related party transactions. The Audit Committee may consult
with management, but shall not delegate these responsibilities.
The Audit Committee shall have the authority, to the extent it deems necessary
or appropriate, to retain special legal, accounting or other consultants to
advise the Committee. The Audit Committee may request any officer or employee of
the Company or the Company's outside counsel or independent auditor to attend a
meeting of the Committee or to meet with any members of, or consultants to, the
Committee. The Audit Committee shall establish procedures for the receipt,
retention and treatment of complaints regarding the Company's accounting,
financial reporting, internal accounting controls and auditing matters. The
Audit Committee shall also establish procedures for the confidential, anonymous
submission by the Company's employees regarding questionable accounting or
auditing matters. The Audit Committee may form and delegate authority to
subcommittees when appropriate.
45
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.32 - O'Reilly Automotive, Inc. Audit Committee Charter (continued)
The Audit Committee shall meet as often as it determines, but not less
frequently than quarterly. The Audit Committee shall meet with management, the
internal auditors and the independent auditor in separate executive sessions at
least quarterly. The Audit Committee may also, to the extent it deems necessary
or appropriate, meet with the Company's investment bankers or financial analysts
who follow the Company. The Audit Committee shall make regular reports to the
Board and shall annually review its own performance.
The Audit Committee, to the extent it deems necessary or appropriate, shall:
Financial Statement and Disclosure Matters
1. Review and discuss with management and the independent auditor the annual
audited financial statements, including disclosures made in management's
discussion and analysis, and recommend to the Board whether the audited
financial statements should be included in the Company's Annual Report on
Form 10-K.
2. Review and discuss with management and the independent auditor the
Company's quarterly financial statements prior to the filing of its
Quarterly Reports on Form 10-Q, including the results of the independent
auditors' reviews of the quarterly financial statements.
3. Discuss with management and the independent auditor significant financial
reporting issues and judgments made in connection with the preparation of
the Company's financial statements, including any significant changes in
the Company's selection or application of accounting principles, any major
issues as to the adequacy of the Company's internal controls, the
development, selection and disclosure of critical accounting estimates, and
analyses of the effect of alternative assumptions, estimates or GAAP
methods on the Company's financial statements.
4. Discuss with management the Company's earnings press releases, including
the use of "pro forma" or "adjusted" non-GAAP information, as well as
financial information and earnings guidance provided to analysts and rating
agencies.
5. Discuss with management and the independent auditor the effect of
regulatory and accounting initiatives as well as off-balance sheet
structures on the Company's financial statements.
6. Discuss with management the Company's major financial risk exposures and
the steps management has taken to monitor and control such exposures,
including the Company's risk assessment and risk management policies.
7. Discuss with the independent auditor the matters required to be discussed
by Statement on Auditing Standards No. 61 relating to the conduct of the
audit. In particular, discuss:
(a) The adoption of, or changes to, the Company's significant auditing and
accounting principles and practices as suggested by the independent
auditor, internal auditors or management.
(b) The management letter provided by the independent auditor and the
Company's response to that letter.
(c) Any difficulties encountered in the course of the audit work,
including any restrictions on the scope of activities or access to
requested information, and any significant disagreements with
management. Oversight of the Company's Relationship with the
Independent Auditor
8. Review the experience and qualifications of the senior members of the
independent auditor team.
46
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.32 - O'Reilly Automotive, Inc. Audit Committee Charter (continued)
9. Obtain and review a formal, written report from the independent auditor at
least annually regarding (a) the auditor's internal quality-control
procedures, (b) any material issues raised by the most recent
quality-control review, or peer review, of the firm, or by any inquiry or
investigation by governmental or professional authorities within the
preceding five years respecting one or more independent audits carried out
by the firm, (c) any steps taken to deal with any such issues, and (d) all
relationships between the independent auditor and the Company (consistent
with auditor professional responsibility standards, I.S.B. No. 1). Evaluate
the qualifications, performance and independence of the independent
auditor, including considering whether the auditor's quality controls are
adequate and the provision of non-audit services is compatible with
maintaining the auditor's independence, and taking into account the
opinions of management and the internal auditor. The Audit Committee shall
present its conclusions to the Board and, if so determined by the Audit
Committee, recommend that the Board take additional action to satisfy
itself of the qualifications, performance and independence of the auditor.
10. Require the rotation of the lead audit partner and the concurring audit
partner every five years in order to assure continuing auditor
independence. The Audit Committee shall consider whether it is appropriate
to adopt a policy of rotating the independent auditing firm itself on a
regular basis.
11. Recommend to the Board policies for the Company's hiring of employees or
former employees of the independent auditor who were engaged on the
Company's account. The Audit Committee shall require a one year "cooling
off" period before a member of the independent auditor team can begin
working for the Company in certain key positions such as chief executive
officer, controller, chief financial officer, chief accounting officer or
any equivalent position.
12. Discuss with the national office of the independent auditor issues on which
they were consulted by the Company's audit team and matters of audit
quality and consistency.
13. Meet with the independent auditor prior to the audit to discuss the
planning and staffing of the audit. Oversight of the Company's Internal
Audit Function
14. Review the appointment and replacement of the senior internal auditing
executive.
15. Review the significant reports to management prepared by the internal
auditing department and management's responses.
16. Discuss with the independent auditor the internal audit department
responsibilities, budget and staffing and any recommended changes in the
planned scope of the internal audit. Compliance Oversight Responsibilities
17. Obtain from the independent auditor assurance that Section 10A of the
Securities Exchange Act of 1934 has not been implicated.
18. Obtain reports from management, the Company's senior internal auditing
executive and the independent auditor that the Company is in conformity
with applicable legal requirements and the Company's Code of Business
Conduct and Ethics. Review reports and disclosures of insider and
affiliated party transactions. Advise the Board with respect to the
Company's policies and procedures regarding compliance with applicable laws
and regulations and with the Company's Code of Business Conduct and Ethics.
19. Discuss with management and the independent auditor any correspondence with
regulators or governmental agencies and any employee complaints or
published reports which raise material issues regarding the Company's
financial statements or accounting policies.
20. Discuss with the Company's General Counsel legal matters that may have a
material impact on the financial statements or the Company's compliance
policies.
47
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.32 - O'Reilly Automotive, Inc. Audit Committee Charter (continued)
Periodic Review of Charter
The Audit Committee, with the assistance of counsel and/or the Company's
independent accountants, shall reassess the adequacy of its Charter at least
annually to ensure consistency with changing needs and compliance with all legal
and regulatory requirements, and recommend any proposed changes to the Board for
approval.
Limitation of Audit Committee's Role
While the Audit Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Audit Committee to plan or conduct audits or
to determine that the Company's financial statements and disclosures are
complete and accurate and are in accordance with generally accepted accounting
principles and applicable rules and regulations. These are the responsibilities
of management and the independent auditor.
48
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.33 - O'Reilly Automotive, Inc. Compensation Committee Charter
O'REILLY AUTOMOTIVE, INC.
COMPENSATION COMMITTEE CHARTER
Purpose
The Compensation Committee (the "Committee") of O'Reilly Automotive, Inc. (the
"Company") is appointed by, and generally acts on behalf of, the Board of
Directors of the Company (the "Board"). The Board has determined to establish
the governing principles of the Committee through the adoption of this charter
(the "Charter").
The Compensation Committee's principal purposes shall be: (1) to discharge the
Board's responsibilities relating to compensation of the Company's executives;
(2) to produce an annual report on executive compensation for inclusion in the
Company's proxy statement; and (3) to oversee and advise the Board on the
adoption of policies that govern the Company's compensation programs, including
stock and benefit plans.
Membership
The Committee shall be composed of three or more directors. Each member of the
Committee shall meet the independence and experience requirements of the federal
securities laws and the applicable rules and regulations of the Securities and
Exchange Commission ("SEC") and the Nasdaq National Market ("Nasdaq"), as such
requirements may change from time to time.
The members of the Committee shall be appointed by the Board. The Board shall
designate one member of the Committee to serve as Chairperson. If the
Chairperson is absent from a meeting, another member of the Committee may act as
Chairperson. Members of the Committee will be appointed for three-year terms and
shall serve until their resignation, retirement, or removal by the Board or
until their successors shall be appointed. The Board may fill vacancies on the
Committee and remove a member of the Committee at any time with or without
cause. No member of the Committee shall be removed except by majority vote of
the independent directors of the Board then in office, provided that a member
that no longer serves as a director of the Company shall be deemed automatically
removed without any further action by the Board.
Authority
The Committee will have the resources and authority necessary to discharge its
duties and responsibilities, including the authority to retain outside counsel
or other experts or consultants, as it deems appropriate. Any communications
between the Committee and legal counsel in the course of obtaining legal advice
will be considered privileged communications of the Company and the Committee
will take all necessary steps to preserve the privileged nature of those
communications.
Responsibilities and Duties
Subject to the provisions of the Company's Corporate Governance Principles, the
principal responsibilities and functions of the Compensation Committee are as
follows:
1. Review the competitiveness of the Company's executive compensation programs
to ensure (a) the attraction and retention of corporate officers, (b) the
motivation of corporate officers to achieve the Company's business
objectives, and (c) to align the interest of key leadership with the
long-term interests of the Company's shareholders.
2. Review trends in management compensation, oversee the development of new
compensation plans and, when necessary, approve the revision of existing
plans.
49
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.33 - O'Reilly Automotive, Inc. Compensation
Committee Charter (continued)
3. Review the performance of executive management other than the Chief
Executive Officer, who will be reviewed by the Corporate
Governance/Nominating Committee.
4. Review and approve the goals and objectives of the Chairman and Chief
Executive Officer, evaluate the performance of the Chairman and Chief
Executive Officer in light of these corporate objectives, and set the
compensation level of the Chairman and Chief Executive Officer consistent
with Company philosophy.
5. Approve the salaries, bonus and other compensation for all corporate
officers.
6. Review and approve compensation packages for new corporate officers and
termination packages for corporate officers as requested by management.
7. Review and approve the awards made under any executive officer bonus plan,
and provide an appropriate report to the Board.
8. Review and discuss with the Board and senior officers plans for officer
development and corporate succession plans for the Chief Executive Officer
and other senior officers.
9. Review and make recommendations concerning long-term incentive compensation
plans, including the use of stock options and other equity-based plans.
Except as otherwise delegated by the Board, the Committee will act on
behalf of the Board as the "Committee" established to administer
equity-based and employee benefit plans, and as such will discharge any
responsibilities imposed on the Committee under those plans, including
making and authorizing grants, in accordance with the terms of those plans.
10. Review periodic reports from management on matters relating to the
Company's personnel appointments and practices.
11. Produce an annual Compensation Committee Report for the Company's annual
proxy statement in compliance with federal securities laws and the
applicable rules and regulations of the SEC and Nasdaq.
12. Annually evaluate the Committee's performance and this Charter.
Conduct of Meetings
The Committee shall meet when, where and as often as it may deem necessary and
appropriate in its judgment, but in no event less than four (4) times per year,
either in person or telephonically. A majority of the members of the Committee
shall constitute a quorum. The Chairman of the Board and Chief Executive
Officer, the Chairman of the Committee, or the Company's Lead Director shall
have the right to call a special meeting of the Committee. The Committee may
request that any directors, officers or employees of the Company, or other
persons whose advice and counsel are sought by the Committee, attend any meeting
to provide such information as the Committee requests.
The Committee shall fix its own rules of procedure, which shall be consistent
with the Amended and Restated Bylaws of the Company and this Charter. A member
of the Committee or the Corporate Secretary shall keep written minutes of
Committee meetings, which minutes shall be maintained with the books and records
of the Company. The Committee may delegate authority to one or more members of
the Committee when appropriate, but no such delegation shall be permitted if the
authority is required by law, regulation or listing standard to be exercised by
the Committee as a whole.
50
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.34 - O'Reilly Automotive, Inc. Code
of Business Conduct and Ethics
Code of Business Conduct and Ethics
This Code of Business Conduct and Ethics (this "Code") provides a general
statement of the Company's expectations regarding the ethical standards that
each director, officer and team member should adhere to while acting on behalf
of the Company. This Code contains compliance standards and procedures to
facilitate its effectiveness and to ensure a prompt and consistent response to
violations. Each director, officer, and team member is required to read and
become familiar with the ethical standards described in this Code. It is not
intended to and does not in any way constitute an employment contract or
assurance of continued employment, and does not create any rights in any
director, officer, team member, client, supplier, competitor, stockholder or any
other person or entity.
The highest business and ethical standards mandate accountability for adherence
to this Code. Accordingly, any conduct or action that violates this Code will be
subject to disciplinary action, which may include immediate termination
Administration
The Corporate Governance/Nominating Committee of the Board of Directors of
O'Reilly Automotive, Inc. (the "Company"), referred to in this Code as the
Governing Body, is responsible for setting the standards of business conduct
contained in this Code and updating these standards as it deems appropriate to
reflect changes in the legal and regulatory framework applicable to the Company,
the business practices within the Company's industry, the Company's own business
practices, and the prevailing ethical standards of the communities in which the
Company operates. The Company's Internal Auditor will act as the Compliance
Officer and will oversee the procedures designed to implement this Code to
ensure that they are operating effectively. It is the individual responsibility
of each director, officer and team member of the Company to comply with this
Code.
Conflicts of Interest
All directors, officers and team members of the Company should be diligent in
avoiding a conflict of interest with regard to Company's interests. A conflict
of interest exists when there is a conflict (or even an appearance of conflict)
between an individual's personal interests, financial or otherwise, or
professional interests, and his or her fiduciary obligations to the Company. A
conflict situation can arise when a director, officer or team member takes
actions or has interests that may make it difficult to perform his or her work
objectively and effectively. Conflicts of interest may also arise when a
director, officer or team member, or a member of his or her family, receives
improper personal benefits as a result of his or her position in the Company,
whether received from the Company or third party. Federal law prohibits loans by
the Company to its directors and executive officers. It is a conflict of
interest for a Company team member to work simultaneously for a competitor,
customer, or supplier. In addition, directors, officers and team members are not
allowed to work for a competitor as a consultant or board member.
Conflicts of interest are prohibited as a matter of Company policy, except under
guidelines approved by the Corporate Governance/Nominating Committee of the
Board of Directors. Where there is an actual or potential conflict of interest
or perception of a conflict of interest, the director, officer or team member
must make full disclosure and must not participate in the matter giving rise to
the conflict. Such person may, in accordance with such procedures, refrain or be
asked to refrain from participating and/or making decisions concerning any
business that is related to the matter in which there is an actual or potential
conflict of interest.
Any director, officer or team member who becomes aware of a conflict of interest
or potential conflict of interest should bring it to the attention of the
Compliance Officer, a supervisor, manager or other appropriate personnel or
consult the procedures discussed in this Code. Directors, officers and team
members who knowingly fail to disclose conflicts of interest are subject to
disciplinary action, including dismissal or removal from office.
51
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.34 - O'Reilly Automotive, Inc. Code of
Business Conduct and Ethics (continued)
Corporate Opportunities
No director, officer or team member may: (a) take for himself or herself
personally opportunities that are discovered through the use of Company
property, information or position; (b) use Company property, information or
position for personal gain; or (c) compete with the Company. Directors, officers
and team members owe a duty of loyalty to the Company, and must be committed to
advance its legitimate interests when the opportunity to do so arises.
Confidentiality (Protecting Company Information)
All directors, officers and team members must maintain the confidentiality of
confidential information entrusted to them by the Company, its business
partners, suppliers, customers or others related to the Company's business.
Confidential information includes all non-public information that might be of
use to competitors or harmful to the Company, or its customers, if disclosed.
Typical of such information are business, research, and new product plans;
objectives and strategies; trade secrets; unpublished financial or pricing
information; processes and formulas; computer programs; salary and benefits
data; team member medical information; team member, customer, and supplier
lists. Disclosure of confidential information violates Company policy and could
result in disciplinary action, except when authorized by legal counsel as
required by laws, regulations or legal proceedings. If any director, officer or
team member believes they have a legal obligation to disclose confidential
information, they should consult the Company's legal counsel.
Any Company information created in the course of employment belongs to the
Company. Team members leaving the Company must return all written proprietary
information in their possession. A team member's obligation to protect the
Company's proprietary and confidential information continues even after he or
she leaves the Company.
Protection and Proper Use of Company Assets
Safeguarding Company assets is the responsibility of all directors, officers and
team members. All directors, officers and team members should protect the
Company's assets and ensure their efficient use. Theft, carelessness, and waste
have a direct impact on the Company's profitability. Any suspected incident of
fraud or theft should be immediately reported for investigation to the
Compliance Officer. All Company assets should be used for legitimate business
purposes. The personal use of Company assets without permission is prohibited.
Fair Dealing
The Company considers its reputation for integrity and fairness one of its most
valuable assets. Each director, officer and team member shall endeavor to deal
fairly and in good faith with the Company's customers, stockholders, team
members, suppliers, regulators, business partners, competitors and others. We
seek to outperform our competition fairly and honestly. We seek competitive
advantages through superior performance, never through unethical or illegal
business practices. No director, officer or team member shall take unfair
advantage of anyone through manipulation, concealment, abuse of privileged or
confidential information, misrepresentation, fraudulent behavior, possessing
trade secret information that was obtained without the owner's consent or
through any other unfair dealing practice. No actions shall be taken by any
Company director, officer or team member, which could undermine proper
relationships or tarnish the Company's reputation or integrity.
Occasionally our customers or suppliers may offer gifts to team members. Such
gifts are known as "gratuities" and are generally offered as a means of
influencing a team member's business conduct in some way or influencing his or
her opinion/ relationship with them as a supplier. Our definition of gratuities
includes, but is not limited to, items for personal use such as money, gifts,
merchandise, trips, sporting event tickets, meals, etc.
52
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.34 - O'Reilly Automotive, Inc. Code of
Business Conduct and Ethics (continued)
The Company realizes that during the normal course of business it may be
customary to accept business-related items of incidental value ($20 or less). We
have therefore defined acceptable and unacceptable behavior when dealing with
gratuities as follows: Acceptable - Promotional items and gifts such as ink
pens, caps, calendars, hats, an occasional business related meal, etc., all of
approximate value of $20 or less.
Unacceptable - money, apparel, gifts, merchandise, trips, sporting event
tickets, golf outings, meals including spouse, social meals, etc., with a value
of more than $20. In the event a gratuity is offered by a supplier which is
categorized as unacceptable, the information concerning the gratuity should be
reported according to the Compliance Procedures detailed in this Code.
If it is determined the gratuity can be used to benefit our business, the
gratuity will be accepted and used according to normal company procedure. No
gratuity categorized as unacceptable shall be accepted prior to approval of the
Compliance Officer or the Governing Body.
Sample merchandise obtained for product evaluation during the normal course of
business should be sold as inventory when the evaluation is complete. This would
also apply to premium items. At no time is it acceptable to request specific
application samples for personal use. New products or materials needing to be
"tested" on a personal vehicle must be approved according to the above
procedures and coordinated by a product manager. The results should be reported
to the Product Review Board.
All gratuities must be reported. At the end of each month during which a
gratuity of any type is accepted, it is the responsibility of the team member
accepting the gratuity to complete a Gratuities Report. The completed form
should be sent to the Compliance Officer.
Failure to abide by this policy is grounds for disciplinary action up to and
including termination.
The U.S. Foreign Corrupt Practices Act prohibits giving anything of value
directly or indirectly to officials of foreign governments or foreign political
candidates in order to obtain or retain business. In addition, the promise,
offer or delivery to an official or team member of the U.S. Government of a
gift, favor or other gratuity in violation of these rules would not only violate
Company policy but could also be a criminal offense. State and local
governments, as well as foreign governments, may have similar rules. Please
consult the Compliance Officer to obtain guidance from Company legal counsel in
this area. The Board shall have an independent director designated as the Lead
Independent Director, who shall preside at the executive sessions of the
independent directors and shall be responsible for coordinating the activities
of the other independent directors. The Lead Independent Director shall have
such other authority, responsibilities and duties as determined by the Board.
Compliance with Laws, Rules, and Regulations
The Company expects all directors, officers and team members of the Company to
comply in all respects with the laws and regulations that apply to its business
at all government levels. In addition, the Company requires that its directors,
officers and team members comply with work-place policies and applicable laws
and regulations. Although not all team members are expected to know details of
all laws, it is important to recognize when to seek advice from supervisors.
This Code does not summarize all laws, rules and regulations applicable to the
Company and its directors, officers and team members. Please consult the
Compliance Officer for various guidelines the Company has prepared on specific
laws, rules and regulations, or to obtain further guidance from the Company's
legal counsel.
53
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.34 - O'Reilly Automotive, Inc. Code of
Business Conduct and Ethics (continued)
Accurate and Timely Periodic Reports
The Company is committed to providing investors with full, fair, accurate,
timely and understandable disclosure in the periodic reports that it is required
to file with, or submit to, the Securities Exchange Commission (the "SEC") and
in other public communications made by the Company as a public company. To this
end, the Company shall:
- - Comply with generally accepted accounting principles at all times;
- - Maintain a system of internal accounting controls that will provide
reasonable assurances to management that all transactions are properly
recorded;
- - Maintains books and records that accurately reflect and fairly reflect the
Company's transactions;
- - Prohibit the establishment of any undisclosed or unrecorded funds or
assets;
- - Maintain a system of internal controls that will provide reasonable
assurances to management that material information about the Company is
made known to management, particularly during the periods in which the
Company's periodic reports are being prepared; and
- - Present information in a clear and orderly manner and avoid the use of
legal and financial jargon in the Company's periodic reports.
No action may be taken by any director or officer (or other person acting under
the direction thereof) to fraudulently influence, coerce, manipulate or mislead
the Company's independent auditor for the purpose of rendering the Company's
financial statements materially misleading
The Company considers its disclosure obligation to be of critical importance.
Depending on his or her position with the Company, a director, officer or team
member may be asked to provide necessary information to assure that the
Company's public reports are complete, fair and understandable. The Company
takes it's public reporting very seriously and expects its directors, officers
and team members to provide prompt answers to inquiries by it related to public
disclosure requirements.
Accounting Complaints
The Company's policy is to comply with all applicable financial reporting and
accounting regulations applicable to the Company. If any director, officer or
team member of the Company has concerns or complaints regarding questionable
accounting or auditing matters of the Company, then he or she is encouraged to
submit those concerns or complaints (anonymously, confidentially or otherwise)
to the Audit Committee of the Board of Directors (which will, subject to its
duties arising under applicable law, regulations and legal proceedings, treat
such submissions confidentially) according to the procedures established by the
Audit Committee. Such submissions may be directed to the attention of the
Compliance Officer, the Audit Committee or any director who is a member of the
Audit Committee, at the principal executive offices of the Company.
Insider Trading
Directors, officers and team members who have access to confidential information
are not permitted to use or share that information for stock trading purposes
for any other purpose except in the conduct of our business and in strict
compliance with all applicable laws and SEC regulations. All non-public
information about the Company should be considered confidential information. To
use non-public information for personal financial benefit or to "tip" others who
might make an investment decision on the basis of this information is not only
unethical but also illegal. No director, officer, or team member of the Company
may buy or sell securities of the Company when in possession of "material
non-public information." Directors, officers and team members are required to
comply with the Company's Insider Trading Policy, copies of which are
distributed to all directors, officers and team members and are available from
the Compliance Officer.
54
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.34 - O'Reilly Automotive, Inc. Code of
Business Conduct and Ethics (continued)
Records Retention; Books and Accounts
Directors, officers and team members are expected to become familiar with the
Company's policies on record retention. All of the Company's books, records,
accounts and financial statements must be maintained in reasonable detail to
appropriately reflect the Company's transactions and must conform both to
applicable legal requirements and to the Company's system of internal controls.
Unrecorded or "off the books" funds or assets, i.e. "off the balance sheet"
transactions, should not be maintained unless permitted by applicable law or
regulation
The Company requires honest and accurate recording and reporting of information
in order to make responsible business decisions. For example, only true and
actual numbers of hours worked should be reported. Many team members regularly
use business expense accounts, which must be documented and recorded accurately.
Records should always be retained or destroyed according to the Company's record
retention policies.
Reporting of Illegal or Unethical Behavior
The Company's business and reputation depends, in large measure, on strict
adherence to the provisions of this Code. Every director, officer and team
member is encouraged and obligated to report any known or suspected Code
violations to the Governing Body, supervisors, managers or other appropriate
counsel.
The Company will investigate any matter so reported and may take appropriate
disciplinary and corrective action, up to and including termination. The Company
forbids retaliation of any kind against team members who report violations of
this Code or other illegal or unethical conduct.
Compliance Procedures
Directors, officers and team members who are concerned that violations of this
Code or that other illegal or unethical conduct by directors, officers or team
members of the Company have occurred or may occur should contact their
supervisor. If for any reason, anyone is unable to approach their supervisor
about their concerns or complaints, then they may contact either the Compliance
Officer or any member of the Corporate Governance/Nominating Committee. All
reports of concerns or complaints shall remain confidential to the extent
necessary, subject to applicable law, regulation or legal proceeding.
Waivers
The provisions of this Code may be waived for directors or executive officers
only by a resolution of the Company's independent directors. The provisions of
this Code may be waived for team members who are not directors or executive
officers by the Compliance Officer. Any waiver of this Code granted to a
director or executive officer will be publicly disclosed as required by the
federal securities laws and the applicable rules and regulations of the SEC or
the securities exchange or association on which the Company's securities are
listed for trading.
Political Contribution
Directors, officers and team members are free to contribute to candidates or
otherwise partake in the political process in their individual capacity. All
team members must avoid discussing with [decision-makers] any matters pending
before courts or agencies affecting the Company unless the team member is part
of the Company's legal counsel or obtains the written authorization of the
Company to do so.
55
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 10.34 - O'Reilly Automotive, Inc. Code of
Business Conduct and Ethics (continued)
The Company is committed to maintaining goodwill and to being a good civic
neighbor. Directors, officers and team members are encouraged to serve on boards
of non-profit organizations and in other volunteer capacities. However, if a
director, officer or team member serves in any capacity with a non-profit
organization, such person may not represent either the Company or the
organization in any transaction between them.
No Company funds or assets will be loaned or contributed to any political party
or organization, or to any individual who holds or is a candidate for public
office, except when permitted by applicable law and prior written authorization
is obtained from the Company. The following are examples of activities, which
are illegal under federal law and the laws of those states, which prohibit
corporate political contributions:
- - Contributions by a team member which are reimbursed by Company through
expense accounts or in other ways;
- - Purchase by Company of tickets for political dinners or fundraising events;
- - Contributions in kind, such as loaning team members to political parties or
providing company airplanes for use in political campaigns;
- - Indirect contributions by Company through suppliers, customers or agents.
Political contributions by corporations are permitted by the laws of some states
and foreign countries. Such allowable contributions may include some of the
activities mentioned above, but in all cases, require prior authorization of the
Compliance Officer and, when required by the law, by the Governing Body.
This policy is not intended to discourage or prevent a team member from engaging
in political activities as an individual on his or her own time and at his or
her own expense. It also does not prohibit the team member from making political
contributions from personal funds or from expressing individual views with
respect to legislative or political matters.
Other Company Policies
All directors and team members should be familiar with the Company's existing
Insider Trading Policy and other policies regarding the rights and obligations
of the Company's team members, which may amplify and expand on certain matters
addressed in this Code.
56
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O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders
<table>
<caption>
Selected Consolidated Financial Data
Years ended December 31, 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
- ------------------------- ---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except
per share data)
INCOME STATEMENT DATA:
Product sales $1,511,816 $1,312,490 $1,092,112 $890,421 $754,122 $616,302 $316,399 $259,243 $201,492 $167,057
Cost of goods sold,
including warehouse and
distribution expenses 873,481 759,090 624,294 507,720 428,832 358,439 181,789 150,772 116,768 97,758
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Gross profit 638,335 553,400 467,818 382,701 325,290 257,863 134,610 108,471 84,724 69,299
Operating, selling,
general and
administrative expenses 473,060 415,099 353,987 292,672 248,370 200,962 97,526 79,620 62,687 52,142
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Operating income 165,275 138,301 113,831 90,029 76,920 56,901 37,084 28,851 22,037 17,157
Other income (expense), net (5,233) (7,319) (7,104) (6,870) (3,896) (6,958) 472 1,182 236 376
Provision for income taxes 59,955 48,990 40,375 31,451 27,385 19,171 14,413 11,062 8,182 6,461
---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
Net income $ 100,087 $ 81,992 $ 66,352 $ 51,708 $ 45,639 $ 30,772 $ 23,143 $ 18,971 $ 14,091 $ 11,072
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
BASIC EARNINGS PER COMMON
SHARE:
Net income per share $ 1.86 $ 1.54 $ 1.27 $ 1.01 $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40 $ 0.32
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
Weighted-average common
shares outstanding 53,908 53,114 52,121 51,168 48,674 42,476 42,086 41,728 35,640 34,620
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
EARNINGS PER COMMON SHARE-
ASSUMING DILUTION:
Net income per share $ 1.84 $ 1.53 $ 1.26 $ 1.00 $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39 $ 0.32
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
Weighted-average common
shares outstanding
- adjusted 54,530 53,692 52,786 51,728 49,715 43,204 42,554 42,064 35,804 34,778
========== ========== ========== ======== ======== ======== ======== ======== ======== ========
</table>
57
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Selected Consolidated Financial Data (continued)
<table>
Years ended December 31, 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994
- -------------------------- ---------- ---------- ---------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except
selected operating data)
SELECTED OPERATING DATA:
Number of stores at
year-end(a) 1,109 981 875 672 571 491 259 219 188 165
Total store square
footage at year-end
(in 000's)(a)(b) 7,348 6,408 5,882 4,491 3,777 3,172 1,417 1,151 923 785
Weighted-average
product sales per
store(in 000's)(a)(b) $ 1,413 $ 1,372 $ 1,426 $ 1,412 $ 1,422 $ 1,368 $ 1,300 $ 1,240 $ 1,101 $ 1,007
Weighted-average
product sales
per square foot(b)(d) $ 215 $ 211 $ 219 $ 218 $ 223 $ 238 $ 244 $ 251 $ 227 $ 215
Percentage increase
in same-store
product sales(c) 7.8% 3.7% 8.8% 5.0% 9.6% 6.8% 6.8% 14.4% 8.9% 8.9%
BALANCE SHEET DATA:
Working capital $ 441,617 $ 483,623 $ 429,527 $296,272 $249,351 $208,363 $ 93,763 $ 74,403 $ 80,471 $ 41,416
Total assets 1,187,592 1,009,419 856,859 715,995 610,442 493,288 247,617 183,623 153,604 87,327
Short-term debt 925 682 16,843 49,121 19,358 13,691 130 3,154 231 311
Long-term debt,
less current portion 120,977 190,470 165,618 90,463 90,704 170,166 22,641 237 358 461
Shareholders' equity 784,285 650,524 556,291 463,731 403,044 218,394 182,039 155,782 133,870 70,224
<fn>
(a) Store count for 2002 does not include 27 stores acquired from Dick Smith
Enterprises and Davie Automotive, Inc. in December 2002.
(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 stores open at least one year. Prior to 2000, same-store product
sales data were 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) 1998 does not include stores acquired from Hi/LO. Consolidated weighted
average product sales per square foot were $207.
</fn>
</table>
58
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
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 do-it-yourself (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
auto body paint and related materials, automotive tools and professional service
equipment.
We calculate same-store product sales based on the change in product sales
for stores open at least one year. Prior to January 2000, we calculated
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 salaries and benefits for store and corporate team members, occupancy,
advertising expenses, general and administrative expenses, data processing,
professional expenses and other related expenses.
59
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The fundamental objective of financial reporting is to provide useful
information that allows a reader to comprehend the business activities of our
company. To aid in that understanding, management has identified our "critical
accounting policies." These policies have the potential to have a more
significant impact on our financial statements, either because of the
significance of the financial statement item to which they relate, or because
they require judgment and estimation due to the uncertainty involved in
measuring, at a specific point in time, events which are continuous in nature.
o Cost of goods sold - Cost of goods sold includes warehouse and distribution
expenses and estimates of amounts due from vendors for certain merchandise
allowances and rebates. These estimates are consistent with historical
experience.
o Operating, selling, general and administrative expense (OSG&A) - Operating,
selling, general and administrative expense includes estimates for medical,
worker's compensation and other general liability obligations, which are
partially based on estimates of certain claim costs and historical
experience.
o Accounts receivable - Allowance for doubtful accounts is estimated based on
historical loss ratios and consistently has been within management's
expectations.
o Revenue - Over-the-counter retail sales are recorded when the customer
takes possession of merchandise. Sales to professional installers, also
referred to as "commercial sales", are recorded upon delivery of
merchandise to the customer, generally at the customer's place of business.
Wholesale sales to other retailers, also referred to as "jobber sales" are
recorded upon shipment of merchandise. All sales are recorded net of
estimated allowances and discounts.
o Vendor concessions - The Company receives concessions from its vendors
through a variety of programs and arrangements, including co-operative
advertising, devaluation programs, allowances for warranties and volume
purchase rebates. Co-operative advertising allowances that are incremental
to our advertising program, specific to a product or event and identifiable
for accounting purposes are reported as a reduction of advertising expense
in the period in which the advertising occurred. All other vendor
concessions are recognized as a reduction of cost of sales when recognized
in the consolidated statement of income.
60
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
o Stock-based compensation - We have elected to use the intrinsic value
method of accounting for stock options issued under our stock option plans
and accordingly do not record an expense for such stock options. For
purposes of pro forma disclosures under the fair value method, the
estimated fair value of the options is amortized to expense over the
options' vesting period. Our pro forma information for the years ended
December 31, is as follows:
<table>
<caption>
2003 2002 2001
--------------------------------------
(In thousands, except per share data)
Net income as reported................ $ 100,087 $ 81,992 $ 66,352
Stock-based compensation expense
as reported.......................... - - -
Stock-based compensation expense
under fair value method.............. 9,204 7,217 5,406
--------------------------------------
Pro forma net income.................. $ 90,883 $ 74,775 $ 60,946
======================================
Pro forma basic net income per share.. $ 1.69 $ 1.41 $ 1.17
======================================
Pro forma net income per share-
assuming dilution.................... $ 1.67 $ 1.39 $ 1.15
======================================
</table>
Results of Operations
The following table sets forth, certain income statement data as a percentage of
product sales for the years indicated:
<table>
<caption>
Years ended December 31,
2003 2002 2001
---------------------------
Product sales................................ 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse
and distribution expenses.................. 57.8 57.8 57.2
---------------------------
Gross profit................................. 42.2 42.2 42.8
Operating, selling, general and
administrative expenses.................... 31.3 31.6 32.4
---------------------------
Operating income............................. 10.9 10.6 10.4
Other expense, net........................... (0.3) (0.6) (0.6)
---------------------------
Income before income taxes................... 10.6 10.0 9.8
Provision for income taxes................... 4.0 3.7 3.7
---------------------------
Net income................................... 6.6% 6.3% 6.1%
===========================
</table>
61
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2003 Compared to 2002
Product sales increased $199.3 million, or 15.2% from $1.31 billion in 2002
to $1.51 billion in 2003, primarily due to 128 net additional stores opened
during 2003, and a 7.8% increase in same-store product sales for stores open at
least one year. We believe that the increased product sales achieved by the
existing stores are the result of our offering of a broader selection of
products 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 product sales.
Gross profit increased 15.4% from $553.4 million (42.2% of product sales)
in 2002 to $638.3 million (42.2% of product sales) in 2003. The increase in
gross profit dollars is due to the increase in product sales.
Operating, selling, general and administrative expenses (OSG&A) increased
$58.0 million from $415.1 million (31.6% of product sales) in 2002 to $473.1
million (31.3% of product sales) in 2003. The increase in these expenses in
dollar amount was primarily attributable to increased salaries and benefits,
rent and other costs associated with the addition of employees and facilities to
support the increased level of our operations. The decrease in OSG&A expenses as
a percent of product sales was primarily due to achieving greater economies of
scale resulting from increased product sales and through management's expense
control initiatives.
Other expense, net, decreased by $2.1 million from $7.3 million in 2002 to
$5.2 million in 2003. The decrease was primarily due to a reduction in interest
expense as a result of lower average borrowings under the Company's credit
facility and to a lesser extent lower average interest rates.
Provision for income taxes increased from $49.0 million in 2002 (37.4%
effective tax rate) to $60.0 million in 2003 (37.5% effective tax rate). The
increase in the dollar amount was primarily due to the increase of income before
income taxes.
Principally as a result of the foregoing, net income in 2003 was $100.1
million (6.6% of product sales), an increase of $18.1 million or 22.1%, from net
income in 2002 of $82.0 million (6.3% of product sales).
62
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2002 Compared to 2001
Product sales increased $220.4 million, or 20.2% from $1.09 billion in 2001
to $1.31 billion in 2002, due to 106 net additional stores opened during 2002,
and a 3.7% increase in same-store product sales for stores open at least one
year. We believe that the increased product sales achieved by the existing
stores are the result of our offering of a broader selection of products 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 product sales.
Gross profit increased 18.3% from $467.8 million (42.8% of product sales)
in 2001 to $553.4 million (42.2% of product sales) in 2002. The increase in
gross profit dollars is primarily due to increases in sales. The decrease in
gross profit as a percent of product sales is primarily due to increased product
sales to independent jobbers, which are at a lower gross margin, and increased
distribution costs at the distribution centers acquired from Mid-State
Automotive Distributors, Inc.
Operating, selling, general and administrative expenses increased $61.1
million from $354.0 million (32.4% of product sales) in 2001 to $415.1 million
(31.6% of product sales) in 2002. The increase in these expenses in dollar
amount was primarily attributable to increased salaries and benefits, rent and
other costs associated with the addition of employees and facilities to support
the increased level of our operations. The decrease in OSG&A expenses as a
percent of product sales was primarily due to reductions in payroll, benefits
and other OSG&A expenses through management's expense control initiatives.
Other expense, net, increased by $215,000 from $7.1 million in 2001 to $7.3
million in 2002. The increase was primarily due to interest expense on increased
borrowings under our credit facility and a decrease in interest income.
Provision for income taxes increased from $40.4 million in 2001 (37.8%
effective tax rate) to $49.0 million in 2002 (37.4% effective tax rate). The
increase in the dollar amount was primarily due to the increase of income before
income taxes. The decrease in the effective rate was primarily due to changes in
the mix of business between the states in which we operate.
Principally as a result of the foregoing, net income in 2002 was $82.0
million (6.3% of product sales), an increase of $15.6 million or 23.6%, from net
income in 2001 of $66.4 million (6.1% of product sales).
63
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Net cash provided by operating activities was $172.8 million in 2003,
$104.5 million in 2002 and $50.0 million in 2001. The increase in cash provided
by operating activities in 2003 compared to 2002 was primarily due to increases
in net income, accounts payable, accrued payroll, accrued benefits and
withholdings, partially offset by increases in receivables and inventory. The
increase in accounts payable was primarily due to management's efforts with
vendors to extend the terms of payment. The increases in accrued payroll,
benefits and withholdings, accounts receivable and inventory primarily relate to
the increased level of our operations.
The increase in cash provided by operating activities in 2002 compared to
2001 was primarily due to increases in net income, accounts payable, income
taxes payable, accrued payroll and accrued benefits and withholdings, partially
offset by increases in receivables and inventory. These increases relate
primarily to the increased level of our operations.
Net cash used in investing activities was $134.6 million in 2003, $105.4
million in 2002 and $77.8 million in 2001. The increase in cash used in
investing activities in 2003 and 2002 was primarily due to increased purchases
of property and equipment.
On December 29, 2000, we completed a sale-leaseback transaction. Under the
terms of the transaction, we sold 90 properties, including land, buildings and
improvements, which generated $52.3 million of additional cash. The lease, which
is being accounted for as an operating lease, provides for an initial lease term
of 21 years and may be extended for one initial ten-year period and two
additional successive periods of five years each. The resulting gain of $4.5
million has been deferred and is being amortized over the initial lease term.
Net rent expense during the initial term will be approximately $5.5 million
annually and is included in the table of contractual obligations under
non-cancelable operating leases.
On May 16, 2001, we completed a $100 million private placement of two
series of unsecured senior notes (Senior Notes). The Series 2001-A Senior Notes
were issued for $75 million, are due May 16, 2006, and bear interest at 7.72%
per year. The Series 2001-B Senior Notes were issued for $25 million, are due
May 16, 2008, and bear interest at 7.92% per year. The private placement
agreement allows for a total of $200 million of Senior Notes issuable in series
and is guaranteed by all of our subsidiaries. Proceeds from the transaction were
used to reduce outstanding borrowings under our former revolving credit
facility.
In August 2001, we completed a sale-leaseback with O'Reilly-Wooten 2000 LLC
(an entity owned by certain shareholders of the Company). The transaction
involved the sale and leaseback of nine O'Reilly Auto Parts stores and resulted
in approximately $5.6 million of additional cash to the Company. The transaction
did not result in a material gain or loss. The lease, which has been accounted
for as an operating lease, calls for an initial term of 15 years with three
five-year renewal options.
64
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
On June 26, 2003, we completed an amended and restated master agreement to
our $50 million Synthetic Operating Lease Facility (the Facility or the
Synthetic Lease) with a group of financial institutions. The terms of the
Facility provide for an initial lease period of five years, a residual value
guarantee of approximately $44.2 million at December 31, 2003, and purchase
options on the properties. The Facility also contains a provision for an event
of default whereby the lessor, among other things, may require us to purchase
any or all of the properties. One additional renewal period of five years may be
requested from the lessor, although the lessor is not obligated to grant such
renewal. The Facility has been accounted for as an operating lease under the
provisions of Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 13 and related interpretations, including
Financial Interpretation No. 46. Future minimum rental commitments under the
Facility have been included in the table of contractual obligations below.
Capital expenditures were $136.5 million in 2003, $102.3 million in 2002
and $68.5 million in 2001. These expenditures were primarily related to the
opening of new stores, as well as the relocation or remodeling of existing
stores. We either opened or acquired 128, 106 and 203 net stores in 2003, 2002
and 2001, respectively. We remodeled or relocated 46 stores and two distribution
centers in 2003, 27 stores in 2002 and 16 stores in 2001. Three new distribution
centers were acquired; one in 2003, located near Mobile, Alabama and two in
October 2001, located in Nashville, Tennessee and Knoxville, Tennessee.
Our continuing store expansion program requires significant capital
expenditures and working capital principally for inventory requirements. Our
2004 growth plans call for approximately 140 new stores and capital expenditures
of $125 million to $135 million. 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 under our existing credit facilities.
65
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
On July 29, 2002, the Company completed an unsecured, three-year syndicated
credit facility (Credit Facility) in the amount of $150 million led by Wells
Fargo Bank as the Administrative Agent, replacing a five-year syndicated credit
facility. The Credit Facility is guaranteed by all of our subsidiaries and may
be increased to a total of $200 million, subject to the availability of such
additional credit from either existing banks within the Credit Facility or other
banks. The Credit Facility bears interest at LIBOR plus a spread ranging from
0.875% to 1.375% (2.06% at December 31, 2003 and 2.26% at December 31, 2002) and
expires in July 2005. At December 31, 2003 and 2002, $20.0 million and $90.0
million, respectively, of the Credit Facility was outstanding. Additionally,
letters of credit totaling $11.0 million and $6.0 million were outstanding at
December 31, 2003 and 2002, respectively. Accordingly, our aggregate
availability for additional borrowings under the Credit Facility was $119.0
million and $54.0 million at December 31, 2003 and 2002, respectively. Prior to
July 29, 2002, the Company had available an unsecured credit facility providing
for maximum borrowings of $140 million. The facility was comprised of a
revolving credit facility of $125 million, and a term loan of $15 million. The
credit facility, which bore interest at LIBOR plus 0.50%, expired in January
2003. All borrowings outstanding under the old credit facility were fully repaid
in July 2002.
Off Balance Sheet Arrangements
We have utilized various financial instruments from time to time as sources
of cash when such instruments provided a cost effective alternative to our
existing sources of cash. We do not believe, however, that we are dependent on
the availability of these instruments to fund our working capital requirements
or our growth plans.
We completed two sale-leaseback transactions in 2000 and 2001 and the
Synthetic Lease in 2000, the terms of all of which are described above under
Liquidity and Capital Resources. The purpose of the sale-leaseback transactions
was to reduce outstanding borrowings under our former revolving credit facility.
The purpose of the Synthetic Lease was to fund a portion of our store growth,
primarily in 2001 and 2002.
We issue stand-by letters of credit provided by a $20 million sublimit
under the Credit Facility that reduce our available borrowings. These letters of
credit are issued primarily to satisfy the requirements of workers compensation,
general liability and other insurance policies. Substantially all of the
outstanding letters of credit have a one-year term from the date of issuance and
have been issued to replace surety bonds that were previously issued. Letters of
credit totaling $11.0 million and $6.0 million were outstanding at December 31,
2003 and 2002, respectively.
66
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Contractual Obligations
Our contractual obligations, including commitments for future payments
under non-cancelable lease arrangements and short- and long-term debt
arrangements, are summarized below and are fully disclosed in Notes 5 and 6 to
the consolidated financial statements.
<table>
<caption>
Payments Due By Period
-------------------------------------------------------------
Less than 2-3 4-5 After 5
Total 1 Year Years Years Years
Contractual Obligations: (In thousands)
Notes payable.............................. $ 17 $ 12 $ 5 $ - $ -
Long-term debt............................. 120,064 13 95,029 25,022 -
Capital lease obligations.................. 1,821 900 921 - -
Operating leases........................... 321,282 32,671 58,200 48,191 182,220
--------------------------------------------------------------
Total contractual cash obligations......... $ 443,184 $ 33,596 $ 154,155 $ 73,213 $ 182,220
==============================================================
</table>
We believe that our existing cash and cash equivalents, 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.
67
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Quarterly Results
The following table sets forth certain quarterly unaudited operating data
for fiscal 2003 and 2002. 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 therein.
<table>
<caption>
Fiscal 2003
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Product sales.................................... $ 339,475 $ 393,112 $ 412,182 $ 367,047
Gross profit..................................... 140,946 165,713 175,653 156,023
Operating income................................. 33,341 44,726 48,362 38,846
Net income....................................... 19,728 26,924 29,533 23,902
Basic net income per common share................ 0.37 0.50 0.55 0.44
Net income per common share-assuming dilution.... 0.37 0.50 0.54 0.43
<caption>
Fiscal 2002
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Product sales.................................... $ 295,489 $ 343,181 $ 359,579 $ 314,241
Gross profit..................................... 126,028 144,186 152,196 130,990
Operating income................................. 28,638 37,769 40,723 31,171
Net income....................................... 16,642 22,547 24,096 18,707
Basic net income per common share................ 0.31 0.42 0.45 0.35
Net income per common share-assuming dilution.... 0.31 0.42 0.45 0.35
</table>
68
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Shareholder Rights Plan
On May 17, 2002, the Board of Directors adopted a Shareholder Rights Plan.
One Right was distributed for each share of common stock, par value $.01 per
share, of the Company held by shareholders of record as of the close of business
on May 31, 2002. Each right initially entitles shareholders to buy a unit
representing one one-hundredth of a share of a new series of preferred stock of
the Company for $160 and expires on May 30, 2012. The rights generally will be
exercisable only if a person or group acquires beneficial ownership of 15% or
more of the Company's common stock or commences a tender or exchange offer upon
consummation of which such person or group would beneficially own 15% or more of
the Company's common stock. If a person or group acquires beneficial ownership
of 15% or more of the Company's common stock, each right (other than rights held
by the acquiror) will, unless the rights are redeemed by the Company, become
exercisable upon payment of the exercise price of $160 for common stock of the
Company having a market value of twice the exercise price of the right. A copy
of the Stockholder Rights Plan was filed on May 28, 2002, with the Securities
and Exchange Commission, as Exhibit 99.1 to our report on Form 8-K.
New Accounting Standards
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. Under the new rules, a liability for the costs
associated with an exit or disposal activity will be recognized when the
liability is incurred as opposed to the date of an entity's commitment to an
exit plan. The new rules were effective for exit or disposal activities
initiated after December 31, 2002. The adoption of the new rules did not have a
significant impact on our consolidated financial position or results of
operations.
In November 2002, the FASB issued Interpretation 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees. The interpretation elaborates on the
disclosures to be made in interim and annual financial statements of a guarantor
about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing such guarantee. Initial recognition and measurement provisions of the
interpretation were applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements were effective for
financial statements of interim or annual periods ending after December 15,
2002. As of December 31, 2003 and 2002, we did not have any outstanding
guarantees other than subsidiary guarantees of parent debt and a residual value
guarantee as disclosed in Notes 5 and 6, respectively, to the consolidated
financial statements.
69
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
New Accounting Standards (continued)
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, amending SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 148 gives companies electing to expense
employee stock options three methods to do so. In addition, the statement amends
the disclosure requirements to require more prominent disclosure about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results in both annual and interim financial statements.
We have elected to continue using the intrinsic value method of accounting for
stock-based compensation, therefore, SFAS No. 148 did not have any effect on our
consolidated financial position or results of operations. See Note 9 to the
consolidated financial statements for additional information regarding
stock-based compensation.
In January 2003, the FASB issued Financial Interpretation 46, Consolidation
of Variable Interest Entities. The interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity. A
variable interest entity is a corporation, partnership, trust or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. The
interpretation requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. The consolidation requirements of the
interpretation applied immediately to variable interest entities created after
January 31, 2003. The consolidation requirements applied to older entities in
the first fiscal year or interim period beginning after December 15, 2003. On
June 26, 2003, we signed an Amended and Restated Agreement relating to our
properties leased from SunTrust Equity Funding, LLC. The agreement with SunTrust
Equity Funding, LLC has been recorded and disclosed as an operating lease in the
consolidated financial statements in accordance with SFAS No. 13 and Financial
Interpretation 46.
In March 2003, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor. Under the new guidance, cash consideration
received from a vendor should be classified as a reduction of cost of sales. If
the consideration received represents a payment for assets delivered to the
vendor, it should be classified as revenue. If the consideration is a
reimbursement of a specific, incremental, identifiable cost incurred in selling
the vendor's product, the cost should be characterized as a reduction of that
cost incurred. The guidance was adopted by the Company on January 1, 2003. The
Company's policies and practices for recording such vendor concessions as
co-operative advertising and vendor allowances and discounts were aligned with
the EITF's guidance both prior to and after the application date, therefore, the
release did not have any effect on our consolidated financial position or
results of operations.
70
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Forward-Looking Statements
We claim the protection of the safe-harbor for forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Certain statements contained within this annual report discuss, among other
things, expected growth, store development and expansion strategy, business
strategies, future revenues and future performance. These forward-looking
statements are based on estimates, projections, beliefs and assumptions and are
not guarantees of future events and results. Such statements are subject to
risks, uncertainties and assumptions, including, but not limited to,
competition, product demand, the market for auto parts, the economy in general,
inflation, consumer debt levels, governmental approvals, our ability to hire and
retain qualified employees, risks associated with the integration of acquired
businesses, weather, terrorist activities, war and the threat of war. Actual
results may materially differ from anticipated results described in these
forward-looking statements. Please refer to the Risk Factors sections of the
Company's annual report on Form 10-K for the year ended December 31, 2003, for
more details.
71
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
<table>
<caption>
Consolidated Balance Sheets
(In thousands, except per share data)
December 31,
2003 2002
--------------------------
Assets
Current assets:
Cash and cash equivalents.................. $ 21,094 $ 29,333
Accounts receivable, less allowance
for doubtful accounts
of $986 in 2003 and $865 in 2002......... 52,235 45,421
Amounts receivable from vendors, net....... 50,695 42,918
Inventory.................................. 554,309 504,098
Deferred income taxes...................... 4,753 5,040
Other current assets....................... 4,399 4,235
-------------------------
Total current assets................... 687,485 631,045
Property and equipment, at cost:
Land....................................... 58,571 52,362
Buildings.................................. 212,937 160,425
Leasehold improvements..................... 79,994 57,376
Furniture, fixtures and equipment ......... 220,123 177,293
Vehicles................................... 54,517 44,067
-------------------------
626,142 491,523
Accumulated depreciation and amortization.. 177,084 137,922
-------------------------
Net property and equipment............. 449,058 353,601
Notes receivable, less current portion....... 24,313 1,880
Other assets, net............................ 26,736 22,893
-------------------------
Total assets................................. $ 1,187,592 $ 1,009,419
=========================
</table>
72
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Consolidated Balance Sheets (continued)
<table>
<caption>
December 31,
2003 2002
----------------------------
(In thousands)
Liabilities and shareholders' equity
Current liabilities:
Income taxes payable.................. $ 6,872 $ 9,798
Accounts payable...................... 176,513 85,370
Accrued payroll....................... 17,307 15,257
Accrued benefits and withholdings..... 27,368 19,165
Other current liabilities............. 16,883 17,150
Current portion of long-term debt..... 925 682
----------------------------
Total current liabilities........ 245,868 147,422
Long-term debt, less current portion.... 120,977 190,470
Deferred income taxes................... 29,448 15,939
Other liabilities....................... 7,014 5,064
Commitments and contingencies........... - -
Shareholders' equity:
Preferred stock, $0.01 par value:
Authorized shares-5,000,000
Issued and outstanding shares-none.. - -
Common stock, $0.01 par value:
Authorized shares-90,000,000
Issued and outstanding shares-
54,664,976 in 2003
and 53,371,242 in 2002............. 547 534
Additional paid-in capital ............. 302,691 269,030
Retained earnings....................... 481,047 380,960
---------------------------
Total shareholders' equity.............. 784,285 650,524
---------------------------
Total liabilities and
shareholders' equity.................. $ 1,187,592 $ 1,009,419
===========================
</table>
See accompanying notes.
73
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Consolidated Statements Of Income
<table>
<caption>
Years ended December 31,
2003 2002 2001
----------------------------------------
(In thousands, except per share data)
Product sales............................. $ 1,511,816 $ 1,312,490 $ 1,092,112
Cost of goods sold, including
warehouse and distribution expenses...... 873,481 759,090 624,294
Operating, selling, general and
administrative expenses.................. 473,060 415,099 353,987
----------------------------------------
1,346,541 1,174,189 978,281
----------------------------------------
Operating income.......................... 165,275 138,301 113,831
Other income (expense):
Interest expense...................... (6,864) (9,248) (9,092)
Interest income....................... 298 989 1,362
Other, net............................ 1,333 940 626
----------------------------------------
(5,233) (7,319) (7,104)
----------------------------------------
Income before income taxes................ 160,042 130,982 106,727
Provision for income taxes................ 59,955 48,990 40,375
----------------------------------------
Net income................................ $ 100,087 $ 81,992 $ 66,352
========================================
Basic income per common share:
Net income per common share............... $ 1.86 $ 1.54 $ 1.27
========================================
Weighted-average common
shares outstanding....................... 53,908 53,114 52,121
========================================
Income per common share-assuming dilution:
Net income per common
share-assuming dilution................... $ 1.84 $ 1.53 $ 1.26
========================================
Adjusted weighted-average
common shares outstanding................. 54,530 53,692 52,786
========================================
</table>
See accompanying notes.
74
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Consolidated Statements Of Shareholders' Equity
<table>
Additional
Common Stock Paid-In Retained
Shares Par Value Capital Earnings Total
----------------------------------------------------------------------
(In thousands)
Balance at December 31, 2000...................... 51,545 $ 515 $ 230,600 $ 232,616 $ 463,731
Issuance of common stock under
employee benefit plans..................... 223 2 4,856 - 4,858
Issuance of common stock under
stock option plans......................... 1,083 11 14,924 - 14,935
Tax benefit of stock options exercised........ - - 6,415 - 6,415
Net income.................................... - - - 66,352 66,352
----------------------------------------------------------------------
Balance at December 31, 2001...................... 52,851 528 256,795 298,968 556,291
Issuance of common stock under
employee benefit plans..................... 223 3 6,094 - 6,097
Issuance of common stock under
stock option plans......................... 297 3 4,677 - 4,680
Tax benefit of stock options exercised........ - - 1,464 - 1,464
Net income.................................... - - - 81,992 81,992
----------------------------------------------------------------------
Balance at December 31, 2002...................... 53,371 534 269,030 380,960 650,524
Issuance of common stock under
employee benefit plans..................... 242 2 6,746 - 6,748
Issuance of common stock under
stock option plans......................... 1,052 11 21,429 - 21,440
Tax benefit of stock options exercised........ - - 5,486 - 5,486
Net income.................................... - - - 100,087 100,087
----------------------------------------------------------------------
Balance at December 31, 2003...................... 54,665 $ 547 $ 302,691 $ 481,047 $ 784,285
======================================================================
</table>
See accompanying notes.
75
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Consolidated Statements Of Cash Flows
<table>
<caption>
Years ended December 31,
2003 2002 2001
-------------------------------------
(In thousands)
Operating activities
Net income.............................................. $ 100,087 $ 81,992 $ 66,352
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation.......................................... 41,216 35,923 28,963
Amortization.......................................... 1,158 984 1,581
Provision for doubtful accounts and notes............. 2,461 1,873 2,635
Gain on sale of property and equipment................ (264) (58) (158)
Deferred income taxes................................. 13,796 5,666 6,371
Common stock contributed to employee benefit plans.... 4,026 3,512 2,690
Tax benefit of stock options exercised................ 5,486 1,464 6,415
Changes in operating assets and liabilities,
net of the effects of the acquisition:
Accounts receivable................................. (9,108) (5,701) (3,432)
Amounts receivable from vendors .................... (4,824) (4,478) (7,908)
Inventory........................................... (50,211) 56,305) (35,115)
Refundable income taxes............................. - 168 (76)
Other current assets................................ (540) (788) 1,244
Accounts payable.................................... 60,319 23,495 (16,891)
Income taxes payable................................ (2,926) 9,798 (1,011)
Accrued payroll..................................... 2,050 2,391 3,557
Accrued benefits and withholdings................... 8,203 5,127 4,678
Other current liabilities........................... (267) (1,148) (9,756)
Other liabilities................................... 2,179 618 (110)
-------------------------------------
Net cash provided by operating activities 172,841 104,533 50,029
-------------------------------------
Investing activities
Purchases of property and equipment..................... (136,497) (102,257) (68,521)
Proceeds from sale of property and equipment ........... 1,273 2,278 8,534
Acquisition, net of cash acquired ...................... - - (20,536)
Payments received on notes receivable................... 871 862 721
(Investment in) reduction of other assets.............. (212) (6,268) 1,956
-------------------------------------
Net cash used in investing activities........ (134,565) (105,385) (77,846)
-------------------------------------
Financing activities
Borrowings on notes payable to bank..................... - - 5,000
Payments on notes payable to bank....................... - (5,000) (35,000)
Proceeds from issuance of long-term debt................ 27,900 179,640 289,974
Principal payments on long-term debt.................... (98,577) (166,761) (243,422)
Net proceeds from issuance of common stock.............. 24,162 7,265 17,102
-------------------------------------
Net cash provided by (used in) financing activities..... (46,515) 15,144 33,654
-------------------------------------
Net increase (decrease) in cash and cash equivalents.... (8,239) 14,292 5,837
Cash and cash equivalents at beginning of year.......... 29,333 15,041 9,204
-------------------------------------
Cash and cash equivalents at end of year................ $ 21,094 $ 29,333 $ 15,041
=====================================
</table>
See accompanying notes.
76
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
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 (DIY) customer and the professional installer throughout
Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky,
Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Tennessee,
Texas and Virginia.
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
Over-the-counter retail sales are recorded when the customer takes
possession of merchandise. Sales to professional installers, also referred to as
"commercial sales", are recorded upon delivery of merchandise to the customer,
generally at the customer's place of business. Wholesale sales to other
retailers, also referred to as "jobber sales" are recorded upon shipment of
merchandise. All sales are recorded net of estimated allowances and discounts.
Use of Estimates
The preparation of the consolidated financial statements, in conformity
with accounting principles generally accepted in the United States (GAAP),
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 $543,924,000 and $499,501,000 as of December 31, 2003,
and 2002, respectively. During 2003, the Company entered into various programs
and arrangements with certain of its vendors that provide for extended dating
and payment terms for inventory purchases, including pay-on-scan arrangements.
77
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amounts Receivable from Vendors
The Company receives concessions from its vendors through a variety of
programs and arrangements, including co-operative advertising, devaluation
programs, allowances for warranties and volume purchase rebates. Co-operative
advertising allowances that are incremental to our advertising program, specific
to a product or event and identifiable for accounting purposes are reported as a
reduction of advertising expense in the period in which the advertising
occurred. All other vendor concessions are recognized as a reduction of cost of
sales when recognized in the consolidated income statement. Amounts receivable
from vendors also includes amounts due the Company for changeover merchandise
and product returns. Reserves for uncollectable amounts receivable from vendors
are provided for in the Company's consolidated financial statements and
consistently have been within management's expectations.
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
forty years. Leasehold improvements are amortized over the lesser of the useful
lives or the term of the respective underlying lease. 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, 2003, 2002 and
2001, were $1,808,000, $369,000 and $1,358,000, respectively.
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 the 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.
78
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
charged to operations amounted to $19,533,000, $14,442,000 and $12,796,000 for
the years ended December 31, 2003, 2002 and 2001, respectively.
Pre-opening 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 10, 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. SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, further established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. Under the intrinsic value method in accordance with
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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the year ended December 31, is as follows:
<table>
<caption>
2003 2002 2001
------------------------------------
(In thousands, except per share data)
Net income as reported................. $ 100,087 $ 81,992 $ 66,352
Stock-based compensation expense
as reported.......................... - - -
Stock-based compensation expense
under fair value method.............. 9,204 7,217 5,406
Pro forma net income................... $ 90,883 $ 74,775 $ 60,946
Pro forma basic net income per share... $ 1.69 $ 1.41 $ 1.17
Pro forma net income per share-
assuming dilution.................... $ 1.67 $ 1.39 $ 1.15
</table>
79
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Share
Basic earnings per share is based on the weighted-average outstanding
common shares. Diluted earnings per share is based on the weighted-average
outstanding shares adjusted for the effect of common stock equivalents. Common
stock equivalents that could potentially dilute basic earnings per share in the
future that were not included in the fully diluted computation because they
would have been antidilutive were 66,750, 816,250 and 28,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
Cash Equivalents
Cash equivalents consist of investments with maturities of 90 days or less
at the day of purchase.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts and notes receivable.
The Company grants credit to certain customers who meet the Company's
pre-established credit requirements. Concentrations of credit risk with respect
to these trade receivables are limited because the Company's customer base
consist of a large number of smaller customers, thus spreading the trade credit
risk. The Company controls credit risk through credit approvals, credit limits
and monitoring procedures and generally 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 carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and long-term debt,
as reported in the accompanying consolidated balance sheets, approximates fair
value.
Notes Receivable
The Company had notes receivable from vendors and other third parties
amounting to $27,636,000 and $2,362,000 at December 31, 2003 and 2002,
respectively. The notes receivable, which bear interest at rates ranging from 0%
to 6%, are due in varying amounts through August 2017.
80
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements
In June, 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Under the new rules, a liability
for the costs associated with an exit or disposal activity will be recognized
when the liability is incurred as opposed to the date of an entity's commitment
to an exit plan. The new rules are effective for exit or disposal activities
that are initiated after December 31, 2002. The adoption of the new rules did
not have a significant impact on our consolidated financial position or results
of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, amending SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 148 gives companies electing to expense
employee stock options three methods to do so. In addition, the statement amends
the disclosure requirements to require more prominent disclosure about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results in both annual and interim financial statements.
The Company has elected to continue using the intrinsic value method of
accounting for stock-based compensation, therefore, SFAS No. 123 did not have
any effect on the Company's consolidated financial position or results of
operations. See Note 9 to the consolidated financial statements for additional
information regarding stock-based compensation.
In November 2002, the FASB issued Financial Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees. The interpretation
elaborates on the disclosures to be made in interim and annual financial
statements of a guarantor about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing such guarantee. Initial recognition and measurement
provisions of the interpretation were applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements were effective for financial statements of interim or annual
periods ending after December 15, 2002. As of December 31, 2003 and 2002, the
Company did not have any outstanding guarantees other than subsidiary guarantees
of parent debt and a residual value guarantee as disclosed in Notes 5 and 6,
respectively, to the consolidated financial statements.
81
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements (continued)
In January 2003, the FASB issued Financial Interpretation 46, Consolidation
of Variable Interest Entities. The interpretation expands upon and strengthens
existing accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity. A
variable interest entity is a corporation, partnership, trust or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. The
interpretation requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. The consolidation requirements of the
interpretation applied immediately to variable interest entities created after
January 31, 2003. The consolidation requirements applied to older entities in
the first fiscal year and interim period beginning after December 15, 2003. On
June 26, 2003, the Company signed an Amended and Restated Agreement relating to
our properties leased from SunTrust Equity Funding, LLC. As a result, the
agreement with SunTrust Equity Funding, LLC has been properly recorded and
disclosed as an operating lease in the consolidated financial statements.
In March 2003, the Emerging Issues Task Force (EITF) reached a consensus on
Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor. Under the new guidance, cash consideration
received from a vendor should be classified as a reduction of cost of sales. If
the consideration received represents a payment for assets delivered to the
vendor, it should be classified as revenue. If the consideration is a
reimbursement of a specific, incremental and identifiable cost incurred in
selling the vendor's product, the cost should be characterized as a reduction of
that cost incurred. The guidance was adopted by the Company on January 1, 2003.
The Company's policies and practices for recording such vendor concessions as
co-operative advertising and vendor allowances and discounts were aligned with
the EITF's guidance both prior to and after the application date, therefore, the
release did not have any effect on our consolidated financial position or
results of operations.
82
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 2-ACQUISITION
On October 1, 2001, the Company purchased all of the outstanding stock of
Mid-State Automotive Distributors, Inc. (Mid-State) for approximately $20.5
million including acquisition costs. Mid-State was a specialty retailer which
supplied automotive aftermarket parts throughout certain states in the
southeastern part of the United States. The acquisition was accounted for using
the purchase method of accounting, and accordingly, the results of operations of
Mid-State are included in the consolidated statements of income from the date of
acquisition. The purchase price was allocated to assets acquired and liabilities
assumed based on their estimated fair values on the date of acquisition. The pro
forma effect on earnings of the acquisition of Mid-State was not material.
NOTE 3-RELATED PARTIES
The Company leases certain land and buildings related to its O'Reilly Auto
Parts stores under six-year operating lease agreements with O'Reilly Investment
Company and O'Reilly Real Estate Company, partnerships in which certain
shareholders and directors of the Company are partners. Generally, these lease
agreements provide for renewal options for an additional six years at the option
of the Company. Additionally, the Company leases certain land and buildings
related to O'Reilly Auto Parts stores under 15-year operating lease agreements
with O'Reilly-Wooten 2000 LLC, which is owned by certain shareholders of the
Company. Generally, these lease agreements provide for renewal options for two
additional five-year terms at the option of the Company (see Note 6). Rent
expense under these operating leases totaled $3,238,000, $3,222,000 and
$2,894,000 in 2003, 2002 and 2001, respectively.
NOTE 4-NOTE PAYABLE TO BANK
At December 31, 2001, the Company had available short-term unsecured bank
lines of credit providing for maximum borrowings of $5 million, all of which was
outstanding at December 31, 2001. The lines of credit were fully repaid in 2002.
NOTE 5-LONG-TERM DEBT
On July 29, 2002, the Company completed an unsecured, three-year syndicated
credit facility (Credit Facility) in the amount of $150 million led by Wells
Fargo Bank as the Administrative Agent, replacing a five-year syndicated credit
facility. The Credit Facility is guaranteed by all of our subsidiaries and may
be increased to a total of $200 million, subject to availability of such
additional credit from either existing banks within the Credit Facility or other
banks. The Credit Facility bears interest at LIBOR plus a spread ranging from
0.875% to 1.375% (2.06% at December 31, 2003 and 2.26% at December 31, 2002) and
expires in July 2005. At December 31, 2003 and 2002, $20.0 million and $90.0
million, respectively, of the Credit Facility was outstanding. Additionally,
letters of credit totaling $11.0 million and $6.0 million were outstanding at
December 31, 2003 and 2002, respectively. Accordingly, our aggregate
availability for additional borrowings under the Credit Facility was $119.0
million and $54.0 million at December 31, 2003 and 2002, respectively. Prior to
July 29, 2002, the Company had available an unsecured credit facility providing
for maximum borrowings of $140 million. The former facility was comprised of a
revolving credit facility of $125 million, and a term loan of $15 million. The
former facility, which bore interest at LIBOR plus 0.50%, expired in January
2003. All borrowings outstanding under the old credit facility were fully repaid
in July 2002.
83
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 5-LONG-TERM DEBT (CONTINUED)
The Company issues stand-by letters of credit provided by a $20 million
sublimit under the Credit Facility that reduce available borrowings. These
letters of credit are issued primarily to satisfy the requirements of workers
compensation, general liability and other insurance policies. Substantially all
of the outstanding letters of credit have a one-year term from the date of
issuance and have been issued to replace surety bonds that were previously
issued. Letters of credit totaling $11.0 million and $6.0 million were
outstanding at December 31, 2003 and 2002, respectively.
On May 16, 2001, the Company completed a $100 million private placement of
two series of unsecured senior notes (Senior Notes). The Series 2001-A Senior
Notes were issued for $75 million, are due May 16, 2006, and bear interest at
7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are
due May 16, 2008, and bear interest at 7.92% per year. The private placement
agreement allows for a total of $200 million of Senior Notes issuable in series.
Proceeds from the transaction were used to reduce outstanding borrowings under
the Company's former revolving credit facility.
The Company leases certain computer equipment under capitalized leases. The
lease agreements have terms ranging from 30 months to 36 months, expiring from
2004 to 2006. At December 31, 2003, the monthly installments under these
agreements were approximately $85,000. The present value of the future minimum
lease payments under these agreements totaled $882,000 and $549,000 at December
31, 2003, and 2002, respectively, which has been classified as long-term debt in
the accompanying consolidated financial statements. During 2003, 2002 and 2001,
the Company purchased $1,426,000, $812,000 and $467,000, respectively, of assets
under capitalized leases.
Additionally, the Company has various unsecured notes payable to
individuals and banks, amounting to $81,000 and $172,000, at December 31, 2003,
and 2002, respectively. The weighted-average interest rate on these notes is
7.2% with monthly installments of approximately $2,000 including interest.
Principal maturities of long-term debt for each of the next five years
ending December 31, are as follows (amounts in thousands):
<table>
2004 $ 925
2005 20,650
2006 75,305
2007 17
2008 25,005
Thereafter 0
----------
$ 121,902
==========
</table>
Cash paid by the Company for interest during the years ended December 31,
2003, 2002, and 2001, amounted to $6,864,000, $9,248,000, and $9,092,000,
respectively.
84
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 6-COMMITMENTS
Lease Commitments
On June 26, 2003, we completed an amended and restated master agreement to
our $50 million Synthetic Operating Lease Facility (the Facility or the
Synthetic Lease) with a group of financial institutions. The terms of the
Facility provide for an initial lease period of five years, a residual value
guarantee of approximately $44.2 million at December 31, 2003, and purchase
options on the properties. The Facility also contains a provision for an event
of default whereby the lessor, among other things, may require us to purchase
any or all of the properties. One additional renewal period of five years may be
requested from the lessor, although the lessor is not obligated to grant such
renewal. The amended and restated Facility has been accounted for as an
operating lease under SFAS No. 13 and related interpretations, including
Financial Interpretation No. 46. Future minimum rental commitments under the
Facility have been included in the table of future minimum annual rental
commitments below.
On December 29, 2000, the Company completed a sale-leaseback transaction.
Under the terms of the transaction, the Company sold 90 properties, including
land, buildings and improvements, which generated $52.3 million of additional
cash. The lease, which is being accounted for as an operating lease, provides
for an initial lease term of 21 years and may be extended for one initial
ten-year period and two additional successive periods of five years each. The
resulting gain of $4.5 million has been deferred and is being amortized over the
initial lease term. Net rent expense is approximately $5.5 million annually and
is included in the table of future minimum annual rental commitments below.
In August 2001, the Company completed a sale-leaseback with O'Reilly-Wooten
2000 LLC (an entity owned by certain shareholders of the Company). The
transaction involved the sale and leaseback of nine O'Reilly Auto Parts stores
and resulted in approximately $5.6 million of additional cash to the Company.
The transaction did not result in a material gain or loss. The lease, which has
been accounted for as an operating lease, calls for an initial term of 15 years
with three five-year renewal options.
85
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 6-COMMITMENTS (CONTINUED)
The Company also leases certain office space, retail stores, property and
equipment under long-term, non-cancelable operating leases. Most of these leases
include renewal options and some include options to purchase and provisions for
percentage rent based on sales. At December 31, 2003, future minimum rental
payments under all of the Company's operating leases for each of the next five
years and in the aggregate are as follows (amounts in thousands):
<table>
<caption>
Related Non-related
Parties Parties Total
--------- ---------- ---------
2004 $ 3,255 $ 29,416 $ 32,671
2005 3,062 27,016 30,078
2006 2,882 25,240 28,122
2007 2,865 22,909 25,774
2008 2,790 19,627 22,417
Thereafter 52,732 129,488 182,220
--------- --------- ---------
$ 67,586 $ 253,696 $ 321,282
========= ========= =========
</table>
Rental expense amounted to $31,865,000, $29,652,000 and $25,122,000 for the
years ended December 31, 2003, 2002, and 2001, respectively.
Other Commitments
The Company had construction commitments, which totaled approximately $52.8
million, at December 31, 2003.
86
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 7-LEGAL PROCEEDINGS
The Company is involved in various 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 flows of the
Company.
NOTE 8-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. A total of 1,600,000 shares of common stock were reserved for
issuance under the plan. Employees may contribute up to 100% 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 4% of each employee's contribution.
Additional contributions to the plan may be made as determined annually by the
Board of Directors. After two years of service, Company contributions and
earnings thereon vest at the rate of 20% per year. Company contributions charged
to operations amounted to $4,353,000 in 2003, $3,438,000 in 2002 and $3,207,000
in 2001. Company contributions, in the form of common stock, to the profit
sharing and savings plan to match employee contributions during the years ended
December 31 were as follows:
<table>
<caption>
Year Market
Contributed Shares Value
----------- -------- ----------
2003 42,183 $1,478,000
2002 38,354 1,136,000
2001 37,567 969,000
</table>
Profit sharing contributions accrued at December 31, and funded in the next
year through the issuance of shares of the Company's common stock were as
follows:
<table>
Year Market
Funded Shares Value
------ ------ ----------
2003 85,184 $2,300,000
2002 77,876 2,200,000
2001 88,118 1,729,000
</table>
The Company also sponsors a non-funded non-contributory defined benefit
health care plan, which provides certain health benefits to qualified 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. Post-retirement benefit costs for each of the years ended
December 31, 2003, 2002, and 2001 amounted to $12,000.
87
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 8-EMPLOYEE BENEFIT PLANS (CONTINUED)
Additionally, the Company has adopted a stock purchase plan under which
1,300,000 shares of common stock were reserved for 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, not to exceed 5% of the participants annual
salary. Purchases of common stock under the plan during the years ended December
31 were as follows:
<table>
Weighted
Average Market
Year Shares Price Value
------ ------- ------ ----------
2003 103,457 $27.52 $2,723,000
2002 102,662 25.18 2,585,000
2001 97,991 22.13 2,168,000
</table>
The Company has in effect a performance incentive plan for the Company's
senior management under which 400,000 shares of stock were reserved for
issuance. Shares awarded under the plan vest equally over a three-year period
and are held in escrow until such vesting has occurred. Shares are forfeited
when an employee ceases employment. Shares, net of forfeitures, issued under the
plan during the years ended December 31 were as follows:
<table>
Year Market
Funded Shares Value
------ ------ --------
2003 10,530 $248,000
2002 5,881 175,000
2001 (536) (9,000)
</table>
88
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 9-SHAREHOLDERS' EQUITY
Shareholder Rights Plan
On May 17, 2002, the Board of Directors adopted a Shareholder Rights Plan.
One Right was distributed for each share of common stock, par value $.01 per
share, of the Company held by stockholders of record as of the close of business
on May 31, 2002. The Rights initially entitle stockholders to buy a unit
representing one one-hundredth of a share of a new series of preferred stock of
the Company for $160 and expire on May 30, 2012. The Rights generally will be
exercisable only if a person or group acquires beneficial ownership of 15% or
more of the Company's common stock or commences a tender or exchange offer upon
consummation of which such person or group would beneficially own 15% or more of
the Company's common stock. If a person or group acquires beneficial ownership
of 15% or more of the Company's common stock, each Right (other than Rights held
by the acquiror) will, unless the Rights are redeemed by the Company, become
exercisable upon payment of the exercise price of $160 for common stock of the
Company having a market value of twice the exercise price of the Right. A copy
of the Stockholder Rights Plan was filed on May 28, 2002, with the Securities
and Exchange Commission, as Exhibit 99.1 to our report on Form 8-K.
Stock Option Plans
The Company has a stock option plan under which incentive stock options or
non-qualified stock options may be granted to officers and key employees. An
aggregate of 12,000,000 shares of common stock were reserved for 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. All grants
under the plan since its inception have been non-qualified stock option grants.
A summary of outstanding stock options under this plan is as follows:
<table>
Number
Price per Share of Shares
---------------------------------
Outstanding at December 31, 2000.... $ 8.00 - 26.75 3,295,830
Granted............................ 18.25 - 37.62 1,214,750
Exercised.......................... 8.15 - 26.37 (1,012,695)
Canceled........................... 8.00 - 37.38 (220,750)
---------------------------------
Outstanding at December 31, 2001.... $ 8.69 - 37.62 3,277,135
Granted............................ 24.96 - 35.48 712,500
Exercised.......................... 8.69 - 30.23 (296,858)
Canceled........................... 8.75 - 38.00 (202,075)
---------------------------------
Outstanding at December 31, 2002.... $ 8.94 - 37.62 3,490,702
Granted............................ 23.01 - 44.81 1,035,750
Exercised.......................... 8.94 - 37.62 (1,051,940)
Canceled........................... 8.94 - 38.98 (222,413)
---------------------------------
Outstanding at December 31, 2003.... $ 10.56 - 44.81 3,252,099
=================================
</table>
Options to purchase 1,223,409, 1,566,104 and 1,250,261 shares of common
stock were exercisable at December 31, 2003, 2002, and 2001, respectively.
89
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 9-SHAREHOLDERS' EQUITY (CONTINUED)
The Company also maintains a stock option plan for non-employee directors
of the Company under which 500,000 shares of common stock were reserved for
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 under
this plan is as follows:
<table>
Number
Price per Share of Shares
-----------------------------
Outstanding at December 31, 2000.... $ 9.09 - 23.91 90,000
Granted............................ 20.65 30,000
Exercised.......................... 9.09 - 23.91 (70,000)
-----------------------------
Outstanding at December 31, 2001.... $12.44 - 23.91 50,000
Granted............................ 29.02 30,000
-----------------------------
Outstanding at December 31, 2002.... $12.44 - 29.02 80,000
Granted............................ 29.20 30,000
-----------------------------
Outstanding at December 31, 2003.... $12.44 - 29.20 110,000
=============================
</table>
All options under this plan were exercisable at December 31, 2003, 2002,
and 2001.
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.
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 2003, 2002, and 2001, respectively: risk-free interest rates of
3.61%, 4.01% and 5.16%; volatility factors of the expected market price of the
Company's common stock of .458, .481, and .475; and weighted-average expected
life of the options of 9.4, 9.0 and 9.0 years. The Company assumed a 0% dividend
yield over the expected life of the options. The weighted-average fair values of
options granted during the years ended December 31, 2003, 2002, and 2001 were
$20.56, $17.75 and $16.52, respectively. The weighted-average remaining
contractual life at December 31, 2003, for all outstanding options under the
Company's stock option plans is 7.5 years. The weighted-average exercise price
for all outstanding options under the Company's stock option plans was $26.11,
$22.78 and $20.63 at December 31, 2003, 2002 and 2001, respectively.
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.
90
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 10-INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted income
per common share:
<table>
Years ended December 31,
2003 2002 2001
-------------------------------------
(In thousands, except per share data)
Numerator (basic and diluted):
Net income......................................... $ 100,087 $ 81,992 $ 66,352
Denominator:
Denominator for basic income per common share-
weighted-average shares.......................... 53,908 53,114 52,121
Effect of stock options (Note 9)................... 622 578 665
Denominator for diluted income per common share-
adjusted weighted-average shares and
assumed conversion............................... 54,530 53,692 52,786
Basic net income per common share.................... $ 1.86 $ 1.54 $ 1.27
Net income per common share-assuming dilution........ $ 1.84 $ 1.53 $ 1.26
</table>
91
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 11-INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows at December 31:
<table>
<caption>
2003 2002
----------------------------
(In thousands)
Deferred tax assets:
Current:
Allowance for doubtful accounts.......... $ 373 $ 327
Inventory carrying value................. - 967
Other accruals........................... 6,973 3,746
Total deferred tax assets................ 7,346 5,040
Deferred tax liabilities:
Current:
Inventory carrying value................. 2,593 -
Noncurrent:
Property and equipment................... 29,171 15,685
Other.................................... 277 254
Total deferred tax liabilities.......... 32,041 15,939
Net deferred tax liabilities ........... $ (24,695) $ (10,899)
</table>
92
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 11-INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
<table>
<caption>
Current Deferred Total
(In thousands)
---------------------------------
2003:
Federal.............. $ 41,465 $ 12,362 $ 53,827
State................ 4,694 1,434 6,128
---------------------------------
$ 46,159 $ 13,796 $ 59,955
=================================
2002:
Federal.............. $ 39,038 $ 5,113 $ 44,151
State................ 4,286 553 4,839
---------------------------------
$ 43,324 $ 5,666 $ 48,990
=================================
2001:
Federal.............. $ 30,429 $ 5,702 $ 36,131
State................ 3,575 669 4,244
---------------------------------
$ 34,004 $ 6,371 $ 40,375
=================================
</table>
A reconciliation of the provision for income taxes to the amounts computed
at the federal statutory rate is as follows:
<table>
2003 2002 2001
---------------------------------
(In thousands)
Federal income taxes at statutory rate............... $ 56,015 $ 45,844 $ 37,354
State income taxes, net of federal tax benefit....... 3,935 3,140 2,775
Other items, net..................................... 5 6 246
---------------------------------
$ 59,955 $ 48,990 $ 40,375
=================================
</table>
The tax benefit associated with the exercise of non-qualified stock options
has been reflected as additional paid-in capital in the accompanying
consolidated financial statements.
During the years ended December 31, 2003, 2002, and 2001, cash paid by the
Company for income taxes amounted to $43,007,000, $31,119,000 and $28,676,000,
respectively.
93
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
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, 2003, and 2002, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2003. 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 auditing standards generally
accepted in the United States. 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, 2003, and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
February 19, 2004
94
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Shareholder Information
CORPORATE ADDRESS
233 South Patterson
Springfield, Missouri 65802
417/862-3333
Web site - www.oreillyauto.com
REGISTRAR AND TRANSFER AGENT
UMB Bank
928 Grand Boulevard
Kansas City, Missouri 64141-0064
Inquiries regarding stock transfers, lost certificates or address changes should
be directed to UMB Bank at the above address.
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
Kansas City, Missouri 64105-2143
LEGAL COUNSEL
Gallop Johnson & Neuman, L.C.
101 South Hanley Road, Suite 1600
St. Louis, Missouri 63105
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive, Suite 2100
Chicago, Illinois 60606
ANNUAL MEETING
The annual meeting of shareholders of O'Reilly Automotive, Inc. will be held at
10:00 a.m. local time on May 4, 2004, at the University Plaza Convention Center,
333 John Q. Hammons Parkway in Springfield, Missouri. Sharedholders of record as
of February 27, 2004, will be entitled to vote at this meeting.
FORM 10-K REPORT
The Form 10-K Report of O'Reilly Automotive, Inc. filed with the Securities and
Exchange Commission and our quarterly press releases are available without
charge to shareholders upon written request. These requests and other investor
contacts should be directed to James R. Batten, Executive Vice President of
Finance/Chief Financial Officer, at the corporate address.
TRADING SYMBOL
The Company's common stock is traded on The Nasdaq Stock Market (National
Market) under the symbol ORLY.
95
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
NUMBER OF SHAREHOLDERS
As of February 27, 2004, O'Reilly Automotive, Inc. had approximately 26,299
shareholders based on the number of holders of record and an estimate of the
number of individual participants represented by security position listings.
ANALYST COVERAGE
The following analysts provide research coverage of O'Reilly Automotive, Inc.:
Advest, Inc. - Derrick Irwin
AG Edwards & Sons - Brian Postol
Lehman Brothers Equities Research - Alan Rifkin
Raymond James & Associates - Gerald Marks
Sidoti & Company - Scott Stember
Smith Barney - Bill Sims
SunTrust Robinson Humphrey Capital Markets - Frank Brown
Wells Fargo Securities, LLC - Christopher Svezia
Whitaker Securities LLC - Cid Wilson
William Blair & Company - Sharon Zackfia
UBS Equities - Gary Balter
Piper Jaffray - Reed Anderson
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.
<table>
2003 2002
---------------------------- ----------------------------
High Low High Low
------------- ------------- ------------- -------------
First Quarter $ 27.86 $ 22.91 $ 37.25 $ 28.61
Second Quarter 35.39 26.76 34.42 27.05
Third Quarter 39.96 33.23 32.47 24.10
Fourth Quarter 44.90 36.54 31.40 24.28
For the Year 44.90 22.91 37.25 24.10
</table>
96
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 21.1 - Subsidiaries of the Company
<table>
Subsidiary State of Incorporation
----------------------------------- ----------------------
Ozark Automotive Distributors, Inc. Missouri
Greene County Realty Co. Missouri
O'Reilly II Aviation, Inc. Missouri
Ozark Services, Inc. Missouri
Hi-LO Investment Company Delaware
Hi-LO Management Company Delaware
</table>
One hundred percent of the capital stock of each of the above listed
subsidiaries is directly owned by O'Reilly Automotive, Inc.
97
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 23.1 - Consent of Ernst & Young LLP, independent auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of O'Reilly Automotive, Inc. and Subsidiaries of our report dated February 19,
2004 included in the 2003 Annual Report to Shareholders of O'Reilly Automotive,
Inc. and Subsidiaries.
Our audits also included the consolidated financial statement schedule of
O'Reilly Automotive, Inc. and Subsidiaries listed in Item 15(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-8 No. 33-61632, Form S-8 No. 33-73892, Form S-8 No. 33-91022, Form S-8
No. 333-59568, Form S-8 No. 333-63467 and Form S-8 No. 333-111976) pertaining to
the O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan, the O'Reilly
Automotive, Inc. 2003 Director Stock Option Plan, the O'Reilly Automotive, Inc.
1993 Stock Option Plan, the O'Reilly Automotive, Inc. 1993 Director Stock Option
Plan and the O'Reilly Automotive, Inc. Stock Purchase Plan of O'Reilly
Automotive, Inc. of our report dated February 19, 2004, 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, 2003.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
March 9, 2004
98
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 31.1 - CEO Certification
CERTIFICATIONS
I, David E. O'Reilly, certify that:
1. I have reviewed this annual report on Form 10-K of O'Reilly Automotive,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
March 12, 2004 /s/ David E. O'Reilly
-----------------------------------------
Co-Chairman and Chief Executive Officer
(Principal Executive Officer)
99
<page>
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 31.2 - CFO Certification
CERTIFICATIONS
I, James R. Batten, certify that:
1. I have reviewed this annual report on Form 10-K of O'Reilly Automotive,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
March 12, 2004 /s/ James R. Batten
-----------------------------------------
Executive Vice-President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
100
<page>
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 32.1 - CEO Certification
O'REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of O'Reilly Automotive, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
David E. O'Reilly, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ David E. O'Reilly
- -----------------------------------------
David E. O'Reilly
Chief Executive Officer
March 12, 2004
This certification is made solely for purposes of 18 U.S.C. Section 1350, and
not for any other purpose.
101
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 32.2 - CFO Certification
O'REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of O'Reilly Automotive, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
James R. Batten, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ James R. Batten
- -------------------------------------
James R. Batten
Chief Financial Officer
March 12, 2004
This certification is made solely for purposes of 18 U.S.C. Section 1350, and
not for any other purpose.
102