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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file number 0-21318
O'REILLY AUTOMOTIVE, INC.
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(Exact name of registrant as specified in its charter)
Missouri 44-0618012
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
233 South Patterson
Springfield, Missouri 65801
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(Address of principal executive offices, zip code)
(417) 862-6708
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained 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.
At February 29, 2000, an aggregate of 50,838,036 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
$711,732,504 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:
Document Part-Form 10-K
- -------------------------------------------------------- --------------------
Portions of the Annual Shareholders' Report for the Year
Ended December 31, 1999 Parts II and IV
Proxy Statement for 2000 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
The information contained in this Form 10-K includes statements regarding
matters which are not historical facts (including statements as to O'Reilly
Automotive, Inc.'s plans, beliefs or expectations) which are forward-looking
statements within the meaning of the federal securities laws. Because such
forward-looking statements involve certain risks and uncertainties, our actual
results and the timing of certain events could differ materially from those
discussed in this document. Factors that could cause or contribute to such
differences include those discussed in the Sections captioned "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (incorporated 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, 1999 we operated 571 stores in Texas,
Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana, Nebraska and Illinois.
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. (one of our current directors), 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 11 for a description of certain risks
relevant to an investment in our common stock. These risk factors include, among
others, risks related to competition in the automotive aftermarket business, our
growth strategy, our acquisition strategy, our sensitivity to regional economic
and weather conditions, our dependence upon key and other personnel, the
significant voting control held by our principal shareholders and any latent
Year 2000 matters.
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 which typically attract fewer competitors; and
o enhance service levels offered to our DIY customers by offering a broad
selection of stock keeping units (''SKUs'') and extensive product knowledge
required by professional installers.
We have been committed to a dual market strategy for over 20 years and from the
mid-1980's through 1997 derived approximately 50% of our product sales from our
DIY customers and approximately 50% from our professional installer customers.
As a result of our acquisition of Hi-Lo Automotive, Inc. ("Hi/LO"), which
derived approximately 65% of its sales from DIY customers and approximately 35%
from professional installers prior to the acquisition, for 1999 we derived
approximately 58% of our product sales from our DIY customers and approximately
42% from our professional installer customers. As a result of our historical
success in executing our dual market strategy and our over 77 full-time sales
representatives dedicated solely to calling upon and selling to the professional
installer, we believe we will increase the former Hi/LO stores' 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 nine contiguous states (Missouri, Iowa, Nebraska, Kansas,
Oklahoma, Texas, Louisiana, Arkansas and Illinois) and the strategic locations
of our five 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 over 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 24 consecutive
quarters of year-to-year record sales and earnings growth. We have a strong
senior management team comprised of 38 professionals who average 20 years of
experience with O'Reilly. In addition, our 61 district managers average over 10
years of experience with us.
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 100 stores in 2000
and approximately 120 stores in 2001. All of the sites for our proposed 2000
store openings and a majority of the sites for our proposed 2001 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.
Until 1986, our expansion was targeted to markets with populations of less than
100,000. We entered into a more densely populated market in August 1986 with the
opening of the first of 29 stores in the greater Kansas City, Missouri, market
area. Of the 80 (net) stores opened in 1999, 34 are located in Texas, 20 are
located in Iowa, 6 in Nebraska, 5 in Louisiana, 4 in Arkansas, 4 in Oklahoma, 4
in Kansas and 3 in Missouri. 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 (i) by constructing a new store at a site which is purchased or leased
and stocking the new store with fixtures and inventory, or (ii) by acquiring an
independently owned parts store, typically by the purchase of substantially all
of the inventory and other assets (other than realty) of such store. Store sites
are strategically located in clusters within geographic areas, which 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, 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.
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.
Effective January 31, 1998, we acquired Hi/LO, a specialty retailer and supplier
of automotive aftermarket products headquartered in Houston, Texas. Following
the acquisition, we sold seven Hi/LO stores located in California. Of the 182
stores remaining after such sale, 165 are located in Texas and 17 are located in
Louisiana. Through the Hi/LO acquisition, we also acquired a 425,000 square foot
distribution center located in Houston. The Hi/LO operations are contiguous to
our other operations, thereby creating a natural geographic extension of our
business. In addition, Hi/LO was experienced in serving professional installers,
deriving approximately 35% of its revenues from such customers. We acquired
Hi/LO for a cash purchase price of approximately $49.3 million. At the time of
the acquisition, Hi/LO had $43.2 million of existing debt, which we assumed.
We have continued to realize the benefits of the completed integration of the
182 net stores we acquired through the acquisition of Hi/LO. We have updated the
products offered at the former Hi/LO stores with a product mix consistent with
our existing stores, converted these stores to our Management Information
Systems and, in some cases, renovated or relocated the former Hi/LO stores.
Furthermore, we intend to continue to pursue business in the professional
installer market and benefit from increased leverage in purchasing and reduced
overhead expenses.
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. In 1999, we renovated or relocated 8
stores, and in 2000 we plan to renovate or relocate approximately 13 stores. 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, 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 the Parts Master(R) name brand and our O'Reilly Auto Parts(R),
SuperStart(R), BrakeBest(R), Ultima(R), Thermo-Pro(R) and Omnispark(R)
proprietary name brands. Because most of our private label products are produced
by nationally recognized manufacturers in accordance with our specifications, we
believe that the private label products are generally of equal or, in some
cases, better quality than comparable name brand products, a characteristic
which is important to our professional installer clientele. We further believe
that the private label products are packaged attractively to promote customer
interest and are generally priced below comparable name brand products carried
in our stores.
We purchase automotive products from approximately 400 vendors, the five largest
of which accounted for approximately 24% of our total purchases in 1999. Our
largest vendor in 1999 accounted for approximately 6% of our total purchases and
the next four largest vendors each accounted for 4-5% of such purchases. We have
no long-term contractual purchase commitments with any of our vendors, nor have
we experienced difficulty in obtaining satisfactory alternative sources of
supply for automotive parts. We believe that alternative supply sources exist at
substantially similar costs, for substantially all automotive products that we
sell. It is our policy to take advantage of early payment and seasonal
purchasing discounts offered by our vendors, and to utilize extended dating
terms available from vendors due to volume purchasing. We consider our
relationships with our suppliers to be good.
Store Network
Store Locations. As a result of our dual market strategy, we are able to
profitably operate in both large, densely populated markets and less densely
populated areas which would not otherwise support a national or regional chain
selling to just one portion of the automotive aftermarket. The following table
sets forth the geographic distribution of our stores:
Number
State of Stores
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Texas 208
Missouri 116
Oklahoma 91
Kansas 51
Iowa 42
Louisiana 22
Arkansas 21
Nebraska 19
Illinois 1
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Total 571
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Our stores on average carry approximately 23,000 SKUs and average approximately
6,600 total square feet in size. 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 37 Master Inventory Stores, which on average carry
approximately 37,000 SKUs and average approximately 8,600 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.
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 use bar code scanning technology to price our
merchandise and provide immediate access to our electronic catalog to display
parts and pricing information by make, model and year of vehicle. This system
speeds transaction times, reduces register lines and provides enhanced customer
service. Moreover, 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.
Distribution System
The following table sets forth the distribution centers we currently operate:
Square Number of
Location Footage Stores Served
------------------ ------- -------------
Houston, TX 424,823 191
Springfield, MO 254,720 106
Oklahoma City, OK 238,520 148
Des Moines, IA 148,395 61
Kansas City, MO 128,064 65
In addition, adjacent to the Springfield, Missouri distribution center, we
operate a 36,000 square foot bulk merchandise warehouse used for the
distribution of bulk products such as motor oil, antifreeze, batteries,
lubricants and other fast moving bulk products, and an 18,000 square foot
returned goods processing facility.
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 2000 we plan to:
o pursue our expansion plans for north Texas, with the opening of a recently
purchased distribution center in Dallas, Texas;
o increase the number of stores served by the distribution center in Des
Moines, IA; and
o implement a new warehouse management system in certain distribution
centers, which will enhance the efficiency of our distribution network.
Marketing
Marketing to the DIY Customer. We aggressively promote sales to DIY customers
through an extensive advertising program, which includes direct mail and
newspaper, radio and television advertising in selected markets. We believe that
our advertising and promotional activities have resulted in significant name
recognition in each of our market areas. Newspaper and radio advertisements are
generally directed towards specific product and price promotions, frequently in
connection with specific sale events and promotions. To promote sales to car
enthusiasts, who we believe on an individual basis spend more on automotive
products than the public generally, we sponsor over 48 motorsports shows at over
66 racetracks in nine states, including the NASCAR All-Star Dirt Series, the
O'Reilly Chili Bowl, the World of Outlaws Series, the NASCAR Craftsmen Truck
Series, as well as three National Hotrod Racing Association races in Houston and
Dallas. We have found that the more progressive marketing concepts utilized in
the DIY portion of our business can also be applied to increase sales to our
professional installer customers.
Marketing to the Professional Installer. We have over 77 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. 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 most of our stores;
o a separate counter in most of our stores dedicated exclusively to serving
professional installers;
o trade credit for qualified professional installers;
o broad inventory of merchandise and competitive pricing;
o a professional installer computer system that connects directly to our
inventory system; and
o seminars concerning topics of interest to professional installers, such as
technical updates, safety and general business management.
Marketing to the 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 five.
Of the approximately 60 independently owned parts stores currently purchasing
Automotive Products from Ozark, 56 participate in the Auto Value(R) program
through Ozark. As a participant in this program, an independently owned parts
store which meets certain minimum financial and operational standards is
permitted to indicate its Auto Value(R) membership through the display of the
Auto Value(R) logo, which is owned by The Alliance, Inc. (formerly known as Auto
Value Associates, Inc.), a non-profit buying group consisting of 38 members as
of December 31, 1999, including O'Reilly, engaged in the distribution or sale of
automotive products. Additionally, we provide advertising and promotional
assistance to Auto Value(R) stores purchasing Automotive Products from Ozark, as
well as marketing and sales support. In return for a commitment to purchase
Automotive Products from Ozark, we offer assistance to an Auto Value(R)
independently owned parts store by providing loan guarantees and financing
secured by inventory, furniture and fixtures, making available computer software
for inventory control and performing certain accounting and bookkeeping
functions.
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 61 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 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 20 years of experience with the Company and district managers have an
average length of service with the Company of over 10 years.
Professional Parts People
We believe our highly trained team of Professional Parts People is essential in
providing superior service both to DIY and 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.
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 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.
Team Members
As of December 31, 1999, we had 7,763 full-time team members and 1,720 part-time
team members, of whom 7,086 were employed at our stores, 1,536 were employed at
our distribution centers and 861 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(R), O'Reilly Auto
Parts(R), and Parts Payoff(R) and the trademarks SuperStart(R), BrakeBest(R),
Omnispark(R), First Call(R), Ultima(R), Master Pro(R) and Thermo-Pro(R).
Further, we are licensed to use the registered trademarks and servicemarks Auto
Value(R) and Parts Master(R) 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, which could have a material adverse effect on our operations.
No assurance can be given, however, that significant expenses would not be
incurred by us to comply with any such law or regulation in the future.
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, provide examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the occurrence of the
events described in these risk factors and elsewhere in this Form 10-K could
have a material adverse effect on our business, operating results and financial
condition.
The Automotive Aftermarket Business is Highly Competitive
Both the DIY and professional installer portions of our business are highly
competitive, particularly in the more densely populated areas that we serve.
Some of our competitors are larger than we are and have greater financial
resources. In addition, some of our competitors are smaller than we are overall
but have a greater presence than we do in a particular market. For a list of our
principal competitors, see the "Business-Competition" section of Item 1 of
this Form 10-K.
We Cannot Assure Future Growth
We believe that our ability to open additional stores at an accelerated rate
will be a significant factor in achieving our growth objectives for the future.
Failure to achieve our growth objectives may negatively impact the trading price
of our common stock. Our ability to accomplish our growth objectives is
dependent, in part, on matters beyond our control, such as weather conditions,
zoning and other issues related to new store site development, the availability
of qualified management personnel and general business and economic conditions.
We cannot be sure that our growth plans for 2000 and beyond will be achieved.
For a discussion of our growth strategies, see the "Business-Growth and
Expansion Strategies" section of Item 1 of this Form 10-K.
Acquisitions May Not Lead to Expected Growth
We acquired Hinojosa Auto Parts in April 1999, a distribution center in Dallas,
Texas in December 1999 and plan to acquire Gateway Auto Supply in April 2000. We
expect to continue to acquire companies as an element of our growth strategy.
Acquisitions involve certain risks that could cause our actual growth to differ
from our expectations. For example: (1) we may not be able to continue to
identify suitable acquisition candidates or to acquire additional companies at
favorable prices or on other favorable terms; (2) our management's attention may
be distracted; (3) we may fail to retain key acquired personnel; (4) we may
assume unanticipated legal liabilities and other problems; and (5) we may not be
able to successfully integrate the operations (accounting and billing functions,
for example) of businesses we acquire to realize economic, operational and other
benefits.
Sensitivity to Regional Economic and Weather Conditions
All of our stores are located in the Central and Southern United States. In
particular, approximately 36% of our stores are located in Texas. Therefore, our
business is sensitive to the economic and weather conditions of these regions.
Unusually severe or inclement weather tends to reduce sales, particularly to DIY
customers.
Dependence Upon Key and Other Personnel
Our success has been largely dependent on the efforts of certain key personnel,
including David E. O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr.,
Rosalie O'Reilly Wooten, Ted F. Wise and Greg L. Henslee. 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 2000 Annual Meeting of Shareholders.
Significant Voting Control is held by the O'Reilly Family
As of the date of this Form 10-K the O'Reilly family beneficially owns
approximately 25.0% of the outstanding shares of our common stock. As a result,
the O'Reilly family acting together will continue to be able to exercise
significant voting control over the Company, including the election of our
directors and on any other matter being voted on by our shareholders, including
any merger, sale of assets or other change in control.
Possible Volatility of Our Stock Price
The stock market and the price of our common stock may be subject to volatile
fluctuations based on general economic and market conditions. The market price
for our common stock may also be affected by our ability to meet analysts'
expectations. Failure to meet such expectations, even slightly, could have an
adverse effect on the market price of our common stock. In addition, stock
market volatility has had a significant effect on the market prices of
securities issued by many companies for reasons unrelated to the operating
performance of these companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. If similar litigation were
instituted against us, it could result in substantial costs and a diversion of
our management's attention and resources, which could have an adverse effect on
our business.
Year 2000 Issue
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believe those systems successfully
responded to the Year 2000 date change. The total cost of the project was
approximately $217,000 during 1999 in connection with remediating our systems.
Of the total cost, approximately $38,000 represented the purchase of
replacements or upgrades of software and hardware, which were capitalized. The
remaining portion of the project cost was expensed as incurred during 1999. We
are not aware of any material problems resulting from Year 2000 issues, either
with our products, our internal systems, or the products and services of third
parties. We will continue to monitor our mission critical computer applications
and those of our suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
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.
Item 2. Properties
The following table provides certain information regarding our administrative
offices and distribution centers and offices as of December 31, 1999:
Square
Location Principal Uses(s) Footage Interest
- ----------------- ----------------------------------------- ------- ----------
Springfield, MO Distribution Center and Corporate Offices 274,920 Owned
Springfield, MO Corporate Offices, Training and Technical 35,580 Leased (a)
Center
Springfield, MO Corporate Offices 32,060 Leased (b)
Kansas City, MO Distribution Center and Offices 130,662 Owned
Oklahoma City, OK Distribution Center and Offices 244,460 Owned
Des Moines, IA Distribution Center and Offices 157,720 Owned
Houston, TX Distribution Center and Offices 446,104 Owned
(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. To
facilitate construction, we loaned to the owner of the facility an
aggregate of approximately $2.5 million. The principal balance of such loan
bears interest at a rate of 6% per annum, is payable in equal monthly
installments through January 2005 and is secured by a first deed of trust.
(b) Occupied under the terms of a lease with an unaffiliated party expiring
March 31, 2001, subject to renewal for three three-year terms at our
option.
Of the 571 stores that we operated at December 31, 1999, 236 stores were owned,
273 stores were leased from unaffiliated parties and 62 stores were leased from
one of two real estate investment partnerships and a limited liability
corporation formed by the O'Reilly family. Leases with unaffiliated parties
generally provide for payment of a fixed base rent, payment of certain tax,
insurance and maintenance expenses, and an original term of 10 years, subject to
one or more renewals at our option. The original terms of 15 stores leased from
unaffiliated parties expire prior to the end of 2000. We have entered into
separate master lease agreements with each of the affiliated real estate
investment partnerships for the occupancy of the stores covered thereby. Such
master lease agreements expired on December 31, 1998, and were renewed through
December 31, 2004. We believe that the lease agreements with the affiliated real
estate investment partnerships 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.
Item 3. Legal Proceedings
We are currently involved in a lawsuit as a result of a complaint filed against
Hi/LO in May 1997. The plaintiff in this lawsuit sought to certify a class
action on behalf of persons or entities in the States of Texas, Louisiana and
California that have purchased a battery from Hi/LO since May 1990. The
complaint alleges that Hi/LO offered and sold ''old,'' ''used'' and ''out of
warranty'' batteries as if the batteries were new, resulting in claims for
violations of deceptive trade practices, breach of contract, negligence, fraud,
negligent misrepresentation and breach of warranty. The plaintiff is seeking, on
behalf of the class, an unspecified amount of compensatory and punitive damages,
as well as attorneys' fees and pre- and post-judgment interest. On July 27,
1998, the Trial Court certified this class. We appealed the decision to certify
the class in the Court of Appeals for the Ninth District of Texas. On February
25, 1999, the Court of Appeals issued an opinion affirming the Trial Court's
decision to certify the class. At that time, we appealed the opinion by seeking
a mandamus from the Supreme Court of Texas. On April 6, 1999, the Supreme Court
of Texas asked the plaintiff to file a response, which was filed on April 14,
1999. On May 3, 1999, we filed a reply to that response. To date, we have heard
nothing further from the Texas Supreme Court. We believe that the accusations
made in this case are unfounded, and intend to defend this lawsuit vigorously.
Although the extent of damages suffered by any member of the class is arguably
minimal, it is difficult at this stage of the case to determine the likely
outcome of the case or to quantify the risk that we face from this litigation.
In addition, we and our subsidiaries are involved in various other legal
proceedings incidental to the conduct of our business. Although we cannot
ascertain the amount of liability that we may incur from any of these matters,
we do not currently believe that, in the aggregate, they will have a material
adverse effect on our consolidated financial position, results of operations or
cash flow.
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, 1999.
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 49, Co-President, has been an O'Reilly team member for 30 of
his 49 years. He began his O'Reilly career in sales in 1970, was promoted to
store manager in 1973, and became the Company's 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 39, Co-President, has been with the O'Reilly organization
for 15 years. His O'Reilly career started as a Parts Specialist, and during his
first five years 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 37, has served as Chief Financial Officer and
Treasurer since March 1994 and, in addition, as Vice-President of Finance since
October 1997. Mr. Batten served as our Finance Manager from January 1993 until
being elected to his current position. From September 1986 until joining us in
January 1993, Mr. Batten was employed by the accounting firm of Whitlock, Selim
& Keehn.
PART II
Item 5 Market For Registrant's Common Equity And Related Shareholder Matters
The material contained in the registrant's annual report to its shareholders
(the "Annual Shareholders' Report") under the captions "Market Prices and
Dividend Information" and "Number of Shareholders" included on page 32, is
incorporated here by this reference.
Item 6 Selected Financial Data
The material contained in the Annual Shareholders' Report under the caption
"Selected Consolidated Financial Data" included on pages
12 and 13, is incorporated here by this reference.
Item 7 Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
The material contained in the Annual Shareholders' Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included on pages 14 through 18 is incorporated here by this
reference.
Item 7(A)Quantitative And Qualitative Disclosures About Market Risk
The Company's level of exposure to market risk through derivative financial
instruments and other financial instruments is not material.
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, appearing in the Annual
Shareholders' Report under the captions "Consolidated Financial Statements",
"Notes to Consolidated Financial Statements" and "Report of Independent
Auditors" included on pages 23 through 53, are incorporated here by this
reference.
Item 9 Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure
None.
PART III
Item 10 Directors And Executive Officers Of The Registrant
The information regarding the directors of the Company contained in the
Company's Proxy Statement on Schedule 14A for the 2000 Annual Meeting of
Shareholders ("the Proxy Statement") under the caption "Election of Class I
Directors" is incorporated here by this reference. The Proxy Statement is being
filed with the Securities and Exchange Commission within 120 days of the end of
the Company's most recent fiscal year end. The information regarding executive
officers called for by item 401 of Regulation S-K is included in Part I as Item
4A, in accordance with General Instruction G(3) to Form 10-K, for the executive
officers of the Company who are not also directors.
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 included in the Company's Proxy Statement under the caption
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" is
incorporated here by this reference.
Item 11 Executive Compensation
The material in the Proxy Statement under the caption "Executive Compensation"
other than the material under the caption "Report of the Compensation Committee"
is incorporated here by this reference.
Item 12 Security Ownership Of Certain Beneficial Owners And Management
The material in the Proxy Statement under the caption "Security Ownership of
Management and Certain Beneficial Owners" is incorporated here by this
reference.
Item 13 Certain Relationships And Related Transactions
The material in the Proxy Statement under the caption "Transactions with
Insiders and Others" is incorporated here by this reference.
PART IV
Item 14 Exhibits, Financial Statement Schedule And Reports On Form 8-K
(a) 1. Financial Statements-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statements of O'Reilly Automotive, Inc. and
Subsidiaries included in the Annual Shareholders' Report of the registrant for
the year ended December 31, 1999, are incorporated here by this reference in
Part II, Item 8:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December 31, 1999, 1998
and 1997
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements for the years ended December 31,
1999, 1998 and 1997
Report of Independent Auditors
(a) 2. Financial Statement Schedule-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statement schedule of O'Reilly Automotive,
Inc. and subsidiaries is included in Item 14(d):
Schedule II-Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
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 on Page E-1.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last quarter of the
fiscal year ended December 31, 1999.
(c) Exhibits
See Exhibit Index on page E-1.
d) Financial Statement Schedules
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
- ------------------------------- ---------- ------------------------- -------------- ----------
Col. A Col. B Col. C Col. D Col. E
- ------------------------------- ---------- ------------ ----------- -------------- ----------
Additions -
Description Balance at Additions - Charged to Deductions - Balance at
Beginning Charged to Other Describe End of
of Period Costs and Accounts - Period
Expenses Describe
- ------------------------------- ---------- ------------ ------------ -------------- ----------
Year ended December 31, 1999:
Deducted from asset account:
Allowance for doubtful
accounts $ 613 $ 961 $ 0 $ 893 (1) $ 681
Inventory reserve 160 0 0 107 (3) 53
Year ended December 31, 1998:
Deducted from asset account:
Allowance for doubtful
accounts 363 250 1,382 1,382 (1) 613
Inventory reserve 0 0 160(2) 0 160
Year ended December 31, 1997:
Deducted from asset account:
Allowance for doubtful
accounts 444 662 0 743 (1) 363
(1) Uncollectible accounts written off.
(2) Reserves assumed upon acquisition of Hi/LO.
(3) Inventory acquired from Hi/LO written off.
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 30, 2000
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.
Signature Title Date
/s/ David E. O'Reilly Director, Co-Chairman of the Board and Chief March 30, 2000
- ---------------------------- Executive Officer (principal executive officer)
David E. O'Reilly
/s/ Lawrence P. O'Reilly Director, Co-Chairman of the Board and March 30, 2000
- ---------------------------- Chief Operating Officer
Lawrence P. O'Reilly
/s/ Charles H. O'Reilly, Jr. Director and Vice-Chairman of the Board March 30, 2000
- ----------------------------
Charles H. O'Reilly, Jr.
/s/ Rosalie O'Reilly Wooten Director and Executive Vice-President March 30, 2000
- -----------------------------
Rosalie O'Reilly Wooten
/s/ Charles H. O'Reilly, Sr. Director and Chairman Emeritus March 30, 2000
- -----------------------------
Charles H. O'Reilly, Sr.
/s/ Ted F. Wise Co-President March 30, 2000
- ------------------------------
Ted F. Wise
/s/ Greg Henslee Co-President March 30, 2000
- ------------------------------
Greg Henslee
Vice-President of Finance March 30, 2000
/s/ James R. Batten Chief Financial Officer and Treasurer
- ------------------------------ (principal financial officer)
James R. Batten
/s/ Jay D. Burchfield Director March 30, 2000
- ------------------------------
Jay D. Burchfield
/s/ Joe C. Greene Director March 30, 2000
- ------------------------------
Joe C. Greene
EXHIBIT INDEX
Exhibit
No. Description
2.1* Plan of Reorganization Among the Registrant, Greene County Realty
Co. ("Greene County Realty") and Certain Shareholders.
2.2 Agreement and Plan of Merger, dated as of December 23, 1997, by and
among O'Reilly Automotive, Inc., Shamrock Acquisition, Inc. and Hi/LO
Automotive, Inc., filed as Exhibit (c)(1) to the Registrant's Tender
Offer Statement on Schedule 14D-1 dated December 23, 1997.
3.1* Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
3.3 Restated Articles of Incorporation of the Registrant, as Amended.
4.1* Form of Stock Certificate for Common Stock.
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.
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, filed on and incorporated here by this reference.
10.8* (a) O'Reilly Automotive, Inc. 1993 Stock Option Plan.
10.9* (a) O'Reilly Automotive, Inc. Stock Purchase Plan.
10.10* (a) O'Reilly Automotive, Inc. Director Stock Option Plan.
10.11* Commercial and Industrial Real Estate Sale Contract between Westing-
house Electric Corporation and Registrant.
10.12* Form of Assignment, Assumption and Indemnification Agreement between
Greene County Realty and Shamrock Properties, Inc.
10.13 Loan commitment and construction loan agreement between the
Registrant and Deck Enterprises, filed as Exhibit 10.13 to the
Registrant's Annual Shareholders' Report on Form 10-K for the year
ended December 31, 1993.
10.14 Lease between the Registrant and Deck Enterprises, filed as Exhibit
10.14 to the Registrant's Annual Shareholders' Report on Form 10-K
for the year ended December 31, 1993.
10.15 Amended Employment Agreement between the Registrant and Charles H.
O'Reilly, Jr., filed as Exhibit 10.17 to the Registrant's Annual
Shareholders' Report on Form 10-K for the year ended December 31,
1996.
10.16 O'Reilly Automotive, Inc. Performance Incentive Plan, filed as
Exhibit 10.18 (a) to the Registrant's Annual Shareholders' Report on
Form 10-K for the year ended December 31, 1996.
10.17 Second Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, filed as Exhibit 10.20 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
10.18 Credit Agreement between the Registrant and NationsBank, N.A. , dated
October 16, 1997, filed as Exhibit 10.17 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
10.19 Credit Agreement between the Registrant and NationsBank, N.A., dated
January 27, 1998, filed as Exhibit 10.20 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
10.20 Third Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, filed as Exhibit 10.21 to the Registrant's Amended Quarterly
Report on Form 10-Q/A for the quarter ended March 31, 1998.
10.21 First Amendment to the O'Reilly Automotive, Inc. Directors' Stock
Option Plan, filed as Exhibit 10.22 to the Registrant's Amended
Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1998.
10.22 O'Reilly Automotive, Inc. Deferred Compensation Plan, filed as
Exhibit 10.23 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
10.23 Trust Agreement between the Registrant's Deferred Compensation Plan
and Bankers Trust, dated February 2, 1998, filed as Exhibit 10.24 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
13.1 Portions of the 1999 to Shareholders, filed herewith.
21.1 Subsidiaries of the Registrant, filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors, filed herewith.
27.1 Financial Data Schedule, filed herewith.
- --------------------
* Previously filed as Exhibit of same number to the Registration Statement of
the Registrant on Form S-1, File No. 33-58948, and incorporated here by
this reference.
(a) Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
Page E-2
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1999 Annual Report to Shareholders
Selected Consolidated Financial Data
Years ended December 31, 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
(In thousands, except per share data)
INCOME STATEMENT DATA:
Product sales $754,122 $616,302 $316,399 $259,243 $201,492 $167,057 $137,164 $110,147 $94,937 $82,372
Cost of goods sold,
including warehouse and
distribution expenses 428,832 358,439 181,789 150,772 116,768 97,758 82,102 65,066 56,255 50,027
Gross profit 325,290 257,863 134,610 108,471 84,724 69,299 55,062 45,081 38,682 32,345
Operating, selling,
general and administrative
expenses 248,370 200,962 97,526 79,620 62,687 52,142 42,492 35,204 29,961 26,750
Operating income 76,920 56,901 37,084 28,851 22,037 17,157 12,570 9,877 8,721 5,595
Other income (expense), net (3,896) (6,958) 472 1,182 236 376 216 204 (104) (566)
Provision for income taxes 27,385 19,171 14,413 11,062 8,182 6,461 4,556 3,686 3,167 1,837
Income from continuing
operations before cumulative
effects of changes in
accounting principles 45,639 30,772 23,143 18,971 14,091 11,072 8,230 6,395 5,450 3,192
Cumulative effects of
changes in accounting
principles - - - - - - - (163) - -
Income from continuing
operations 45,639 30,772 23,143 18,971 14,091 11,072 8,230 6,232 5,450 3,192
Income (loss) from
discontinued operations - - - - - - 48 129 (68) (186)
Net income $ 45,639 $30,772 $ 23,143 $ 18,971 $ 14,091 $ 11,072 $ 8,278 $ 6,361 $ 5,382 $ 3,006
Basic Earnings Per Common Share:
Income per share from
continuing operations
before cumulative effects
of changes in accounting
principles $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40 $ 0.32 $ 0.25 $ 0.22 $ 0.19 $ 0.11
Income per share from
continuing operations $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40 $ 0.32 $ 0.25 $ 0.21 $ 0.19 $ 0.11
Income (loss) per share from
discontinued operations - - - - - - - 0.01 - (0.01)
Net income per share $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40 $ 0.32 $ 0.25 $ 0.22 $ 0.19 $ 0.10
Weighted average common
shares outstanding 48,674 42,476 42,086 41,728 35,640 34,620 32,940 29,436 29,308 29,244
Earnings Per Common Share -
Assuming Dilution:
Income per share from
continuing operations
before cumulative effects
of changes in accounting
principles $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39 $ 0.32 $ 0.25 $ 0.22 $ 0.19 $ 0.11
Income per share from
continuing operations $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39 $ 0.32 $ 0.25 $ 0.21 $ 0.19 $ 0.11
Income (loss) per share
from discontinued
operations - - - - - - - 0.01 - (0.01)
Net income per share $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39 $ 0.32 $ 0.25 $ 0.22 $ 0.19 $ 0.10
Weighted average common
shares outstanding -
adjusted (d) 49,715 43,204 42,554 42,064 35,804 34,778 33,046 29,436 29,308 29,244
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1999 Annual Report to Shareholders (continued)
Selected Consolidated Financial Data (continued)
Years ended December 31, 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
(In thousands, except selected operating data)
SELECTED OPERATING DATA:
Number of stores at
year end (a) 571 491 259 219 188 165 145 127 116 112
Total store square footage
at year end (in 000's) (b) 3,777 3,172 1,454 1,155 923 785 671 571 511 480
Weighted average product sales
per store (in 000's) (b) $1,423 $1,368 $1,306 $1,239 $1,101 $1,007 $949 $838 $759 $690
Weighted average product sales
per square foot (b) $216.5 $238.0 $235.8 $242.2 $227.3 $215.4 $208.7 $187.2 $174.4 $166.2
Percentage increase in
same-store product sales (c) 9.6% 6.8% 6.8% 14.4% 8.9% 8.9% 14.9% 11.4% 9.2% 11.2%
BALANCE SHEET DATA:
Working capital $249,351 $208,363 $ 93,763 $ 74,403 $ 80,471 $ 41,416 $ 41,193 $ 15,251 $ 13,434 $ 11,634
Total assets 610,442 493,288 247,617 183,623 153,604 87,327 73,112 58,871 49,549 46,148
Short-term debt 19,358 13,691 130 3,154 231 311 495 3,462 1,298 2,281
Long-term debt, less
current portion 90,704 170,166 22,641 237 358 461 732 2,668 3,326 5,082
Long-term debt related to
discontinued operations,
less current portion - - - - - - - 9,873 10,316 9,901
Shareholders' equity 403,044 218,394 182,039 155,782 133,870 70,224 57,805 29,281 22,881 17,480
(a) The number of stores at year-end 1991 and 1992 are net of the combinations
in each such year of two stores located within one mile of each other. Two
stores were closed during 1997 and one was closed in 1998. No other stores
were closed during the periods presented. Additionally, seven former Hi/LO
stores located in California were sold in 1998.
(b) Total square footage includes normal selling, office, stockroom and
receiving space. Weighted average product sales per store and per square
foot are weighted to consider the approximate dates of store openings or
expansions.
(c) Same-store product sales data are calculated based on the change in product
sales of only those stores open during both full periods being compared.
Percentage increase in same-store product sales is calculated based on
store sales results, which exclude sales of specialty machinery, sales by
outside salesmen and sales to employees.
(d) There was no additional dilution until 1993 when options were first
granted.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1999 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
autobody paint and related materials, automotive tools and professional service
equipment.
We calculate same-store product sales based on the change in product sales of
only those stores open during both full periods being compared. We calculate the
percentage increase in same-store product sales based on store sales results,
which exclude sales of specialty machinery, sales by outside salesmen and sales
to employees.
Cost of goods sold consists primarily of product costs and warehouse and
distribution expenses. Cost of goods sold as a percentage of product sales may
be affected by variations in our product mix, price changes in response to
competitive factors and fluctuations in merchandise costs and vendor programs.
Operating, selling, general and administrative expenses consist primarily of
store payroll, store occupancy, advertising expenses, other store expenses and
general and administrative expenses, including salaries and related benefits of
corporate employees, administrative office occupancy expenses, data processing,
professional expenses and other related expenses.
Results of Operations
The following table sets forth certain income statement data as a percentage of
product sales for the years indicated:
Years Ended December 31,
1999 1998 1997
Product sales............................. 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse
and distribution expenses............... 56.9 58.2 57.5
Gross profit 43.1 41.8 42.5
Operating, selling, general and
administrative expenses................. 32.9 32.6 30.8
Operating income.......................... 10.2 9.2 11.7
Other income (expense).................... (0.5) (1.1) 0.1
Income before income taxes................ 9.7 8.1 11.8
Provision for income taxes................ 3.6 3.1 4.5
Net income................................ 6.1% 5.0% 7.3%
1999 Compared to 1998
Product sales increased $137.8 million, or 22.4% from $616.3 million in 1998 to
$754.1 million in 1999 due to 80 net additional stores opened during 1999, and a
$56.4 million, or 9.6% increase in same-store product sales. We believe that the
increased product sales achieved by the existing stores is the result of our
offering of a broader selection of stock keeping units in most stores, an
increased promotional and advertising effort through a variety of media and
localized promotional events, and continued improvement in the merchandising and
store layouts of most stores. Also, our continued focus on serving professional
installers contributed to increased sales.
Gross profit increased 26.2% from $257.9 million (or 41.8% of product sales) in
1998 to $325.3 million (or 43.1% of product sales) in 1999. The increase in
gross profit margin was primarily attributable to the continued improvements in
our product acquisition programs and improved buying power due to the number of
net new stores opened in 1999.
Operating, selling, general and administrative expenses increased $47.4 million
from $201.0 million (or 32.6% of product sales) in 1998 to $248.4 million (or
32.9% of product sales) in 1999. The increase in these expenses in dollar amount
and as a percentage of sales primarily resulted from higher costs for team
member medical and workers' compensation benefits, the continued conversion of
Hi-Lo Automotive, Inc. ("Hi/LO") stores and distribution center, as well as the
addition of team members and facilities to support the increased level of our
operations.
Other expense, net, decreased by $3.1 million from $7.0 million in 1998 to $3.9
million in 1999. The decrease was primarily due to the decrease in interest
expense as a result of repayments of indebtedness under our syndicated credit
facility with a portion of the net proceeds of our secondary offering.
Our provision for income taxes was 37.5% and 38.4%, respectively, of income
before income taxes in 1999 and 1998. The decrease in the effective tax rate
primarily related to a higher percentage of our sales occurring in states with
lower income tax rates.
Principally as a result of the foregoing, net income in 1999 was $45.6 million,
or 6.1% of product sales, an increase of $14.9 million (or 48.3%) from net
income in 1998 of $30.8 million, or 5.0% of product sales.
1998 Compared to 1997
Product sales increased $299.9 million, or 94.8% from $316.4 million in 1997 to
$616.3 million in 1998 due to 182 net additional stores acquired from Hi/LO, 50
net additional stores opened during 1998, and a $33.1 million, or 6.8% increase
in same store product sales. We believe that the customer acceptance experienced
by these new stores and the increased product sales achieved by the existing
stores is the result of our offering of a broader selection of stock keeping
units in most stores, an increased promotional and advertising effort through a
variety of media and localized promotional events, and continued improvement in
the merchandising and store layouts of most stores. Also, our continued focus on
serving professional installers contributed to increased sales.
Gross profit increased 91.6% from $134.6 million (or 42.5% of product sales) in
1997 to $257.9 million (or 41.8% of product sales) in 1998. The decrease in
gross profit margin was primarily attributable to the inclusion of 11 months of
Hi/LO operations, which resulted in a higher cost of sales. The decrease was
offset partially by continued improvements in our product acquisition programs
and conversions in the product lines in the Hi/LO stores.
Operating, selling, general and administrative expenses increased $103.4 million
from $97.5 million (or 30.8% of product sales) in 1997 to $201.0 million (or
32.6% of product sales) in 1998. The increase in these expenses in dollar amount
and as a percentage of sales primarily resulted from the Hi/LO acquisition and
net store openings, as well as the addition of team members and facilities to
support the increased level of our operations.
Other income (expense) decreased by $7.4 million from income of $0.5 million in
1997 to expense of $7.0 million in 1998, primarily due to increased interest
expense from higher balances on long-term debt principally resulting from the
Hi/LO acquisition and growth in the scope of our operations.
Our provision for income taxes was 38.4% of income before income taxes in 1998
and 1997.
Principally as a result of the foregoing, net income in 1998 was $30.8 million,
or 5.0% of product sales, an increase of $7.6 million (or 33.0%) from net income
in 1997 of $23.1 million, or 7.3% of product sales.
Liquidity and Capital Resources
Net cash provided by operating activities was $17.9 million in 1997 and $29.7
million in 1999. Net cash used in operating activities was $19.1 million in
1998. The increase in net cash provided by operating activities in 1999 compared
to 1998 is the result of increases in net income, accrued expenses, accrued
payroll and a larger tax benefit resulting from stock option exercises, net of
increases in inventory and amounts receivable from vendors and decreased
accounts payable. The net cash used in operating activities in 1998 is
principally the result of increases in inventory, amounts receivable from
vendors, refundable income taxes, accounts receivable and decreased accrued
payroll, net of increases in accounts payable and deferred income taxes.
Net cash used in investing activities was $37.7 million in 1997, $100.8 million
in 1998 and $77.8 million in 1999. The increase in cash used in 1998 was
primarily due to the purchase of Hi/LO and increased capital expenditures. The
decrease in cash used in 1999 was due to the Hi/LO acquisition in 1998 and an
increase in payments received on notes receivable, partially offset by increased
purchases of property and equipment.
Capital expenditures were $37.2 million in 1997, $57.7 million in 1998 and $86.0
million in 1999. These expenditures were primarily related to the opening of new
stores, as well as the relocation or remodeling of existing stores. In 1997, we
opened 40 net stores and remodeled or relocated 28 stores. In 1998, we opened 50
net stores and renovated or relocated 18 stores. In 1999, we opened 80 net new
stores and renovated or relocated eight stores. Also, in 1997, 1998 and 1999, we
purchased real estate for new stores and store relocations totaling
approximately $8.1 million, $9.9 million and $16.9 million, respectively. In
1997, we purchased real estate for the Des Moines distribution center totaling
$0.7 million. In December 1999, we acquired a distribution center on 28 acres in
the Dallas area for $5.4 million. We expect this new distribution center to be
operational by late 2000.
Our continuing store expansion program requires significant capital expenditures
and working capital principally for inventory requirements. The costs associated
with the opening of a new store (including the cost of land acquisition,
improvements, fixtures, inventory and computer equipment) are estimated to
average approximately $900,000 to $1.1 million; however, such costs may be
significantly reduced where we lease, rather than purchase, the store site.
Although the cost to acquire the business of an independently owned parts store
varies, depending primarily upon the amount of inventory and the amount, if any,
of real estate being acquired, we estimate that the average cost to acquire such
a business and convert it to one of our stores is approximately $400,000. We
plan to finance our expansion program through cash expected to be provided from
operating activities and available borrowings.
On July 8, 1997, our Board of Directors declared a two-for-one stock split
effected in the form of a 100% stock dividend to all shareholders of record as
of July 31, 1997. The stock dividend was paid on August 31, 1997. Also, on
November 4, 1999, the Board of Directors declared a second two-for-one stock
split effected in the form of a 100% stock dividend to all shareholders of
record as of November 15, 1999. The stock dividend was paid on November 30,
1999.
In March 1999, we sold 3,501,000 shares (before the effect of the November 1999
stock split) of common stock through a secondary public offering. The net
proceeds from that offering, which amounted to $124.6 million, were used to
repay a portion of our outstanding indebtedness under our bank credit facilities
and to fund our expansion.
In order to fund the Hi/LO acquisition, our continuing store expansion program,
and our working capital and general corporate needs, we replaced our lines of
credit in January 1998 with an unsecured, five-year syndicated credit facility
totaling $173 million, which was reduced to $165 million in 1999. The facility
is comprised of a $125 million revolving loan, a $5 million sublimit for the
issuance of letters of credit and a $40 million term loan. This credit facility
is guaranteed by our subsidiaries. At December 31, 1999, the effective interest
rate on the revolving and term loan portions, which each mature on January 27,
2003, was 6.68% per annum. At December 31, 1999, $62,165,000 in borrowings was
available under this credit facility.
We believe that our existing cash, short-term investments, cash expected to be
provided by operating activities, available bank credit facilities and trade
credit will be sufficient to fund both our short- and long-term capital needs
for the foreseeable future.
Inflation and Seasonality
We succeeded, in many cases, in reducing the effects of merchandise cost
increases principally by taking advantage of vendor incentive programs,
economies of scale resulting from increased volume of purchases and selective
forward buying. As a result, we do not believe that our operations have been
materially affected by inflation.
Our business is somewhat seasonal primarily as a result of the impact of weather
conditions on store sales. Store sales and profits have historically been higher
in the second and third quarters (April through September) of each year than in
the first and fourth quarters.
Quarterly Results
The following table sets forth certain quarterly unaudited operating data for
fiscal 1999 and 1998. The unaudited quarterly information includes all
adjustments which management considers necessary for a fair presentation of the
information shown.
The unaudited operating data presented below should be read in conjunction with
our consolidated financial statements and related notes included elsewhere in
this annual report, and the other financial information included here.
Fiscal 1999
--------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Product sales...................................... $166,404 $196,107 $208,401 $183,210
Gross profit....................................... 70,957 81,823 88,001 84,509
Operating income................................... 16,241 19,630 22,231 18,818
Net income......................................... 8,603 11,769 13,412 11,855
Basic net income per common share.................. 0.20 0.23 0.26 0.23
Net income per common share-assuming dilution...... 0.20 0.23 0.26 0.23
Fiscal 1998
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Product sales...................................... $118,269 $165,242 $172,784 $160,007
Gross profit....................................... 50,669 66,201 69,345 71,648
Operating income................................... 10,602 13,745 15,435 17,119
Net income......................................... 5,819 7,672 8,361 8,920
Basic net income per common share.................. 0.14 0.18 0.20 0.21
Net income per common share-assuming dilution...... 0.14 0.18 0.19 0.20
Year 2000 Issue
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and
non-information technology systems and we believe those systems successfully
responded to the Year 2000 date change. The total cost of the project was
approximately $217,000 during 1999 in connection with remediating our systems.
Of the total cost, approximately $38,000 represented the purchase of
replacements or upgrades of software and hardware, which were capitalized. The
remaining portion of the project cost was expensed as incurred during 1999. We
are not aware of any material problems resulting from Year 2000 issues, either
with our products, internal systems, or the products and services of third
parties. We will continue to monitor our mission critical computer applications
and those of our suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 2000. We do not
anticipate that the adoption of SFAS No. 133 will have a significant effect on
the financial position or results of operations of our operations.
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1999 Annual Report to Shareholders (continued)
Consolidated Balance Sheets
December 31,
1999 1998
(In thousands)
Assets
Current assets:
Cash........................................ $ 9,791 $ 1,728
Short-term investments...................... 500 500
Accounts receivable, less allowance
for doubtful accounts of $681 in 1999
and $613 in 1998.......................... 26,462 27,580
Amounts receivable from vendors............. 28,304 26,660
Inventory................................... 293,924 246,012
Refundable income taxes..................... 2,333 3,026
Deferred income taxes....................... 1,776 2,838
Other current assets........................ 1,263 2,538
Total current assets.................... 364,353 310,882
Property and equipment, at cost:
Land........................................ 54,631 40,131
Buildings................................... 112,270 81,770
Leasehold improvements...................... 25,841 17,898
Furniture, fixtures and equipment .......... 80,569 56,897
Vehicles.................................... 19,495 13,511
292,806 210,207
Accumulated depreciation and amortization... 56,289 39,256
236,517 170,951
Deferred income taxes......................... - 3,178
Notes receivable.............................. 3,501 4,137
Other assets.................................. 6,071 4,140
Total assets.................................. $610,442 $493,288
December 31,
1999 1998
(In thousands)
Liabilities and shareholders' equity
Current liabilities:
Note payable to bank........................ $ 5,000 $ 5,000
Accounts payable............................ 64,885 66,737
Accrued expenses............................ 25,635 18,446
Accrued payroll............................. 5,124 3,645
Current portion of long-term debt........... 14,358 8,691
Total current liabilities............... 115,002 102,519
Long-term debt, less current portion.......... 90,704 170,166
Deferred income taxes......................... 1,215 -
Other liabilities............................. 477 2,209
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares-5,000,000
Issued and outstanding shares-none........ - -
Common stock, $.01 par value:
Authorized shares-90,000,000
Issued and outstanding shares-
50,799,353 in 1999 and
42,699,400 in 1998...................... 508 213
Additional paid-in capital ................... 221,628 82,658
Retained earnings............................. 180,908 135,523
Total shareholders' equity.................... 403,044 218,394
Total liabilities and shareholders' equity $610,442 $493,288
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1999 Annual Report to Shareholders (continued)
Consolidated Statements Of Income
Years ended December 31,
1999 1998 1997
----------------------------------------------------
(In thousands, except per share data)
Product sales $ 754,122 $ 616,302 $ 316,399
Cost of goods sold, including warehouse and
distribution expenses...................................... 428,832 358,439 181,789
Operating, selling, general and administrative expenses......... 248,370 200,962 97,526
677,202 559,401 279,315
Operating income................................................ 76,920 56,901 37,084
Other income (expense):
Interest expense............................................ (5,343) (8,126) (139)
Interest income............................................. 402 396 198
Other, net.................................................. 1,045 772 413
(3,896) (6,958) 472
Income before income taxes...................................... 73,024 49,943 37,556
Provision for income taxes...................................... 27,385 19,171 14,413
Net income $ 45,639 $ 30,772 $ 23,143
Basic income per common share:
Net income per common share $ 0.94 $ 0.72 $ 0.55
Weighted average common shares outstanding 48,674 42,476 42,086
Income per common share-assuming dilution:
Net income per common share-assuming dilution $ 0.92 $ 0.71 $ 0.54
Adjusted weighted average common shares outstanding 49,715 43,204 42,554
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1999 Annual Report to Shareholders (continued)
Consolidated Statements Of Shareholders' Equity
Additional
Common Stock Paid-In Retained
Shares Par Value Capital Earnings Total
--------------------------------------------------------------------
(In thousands)
Balance at December 31, 1996...................... 41,874 $ 105 $ 73,964 $ 81,713 $155,782
Two-for-one stock split....................... - 105 - (105) -
Issuance of common stock under................
employee benefit plans..................... 146 - 1,331 - 1,331
Issuance of common stock under
stock option plans......................... 230 1 1,481 - 1,482
Tax benefit of stock options exercised........ - - 301 - 301
Net income.................................... - - - 23,143 23,143
Balance at December 31, 1997...................... 42,250 211 77,077 104,751 182,039
Issuance of common stock under
employee benefit plans..................... 184 1 2,720 - 2,721
Issuance of common stock under stock
option plans............................... 266 1 2,022 - 2,023
Tax benefit of stock options exercised........ - - 839 - 839
Net income.................................... - - - 30,772 30,772
Balance at December 31, 1998...................... 42,700 213 82,658 135,523 218,394
Issuance of common stock through
secondary offering......................... 7,002 35 124,535 - 124,570
Issuance of common stock under
employee benefit plans..................... 176 1 3,829 - 3,830
Issuance of common stock under
stock option plans......................... 922 5 6,521 - 6,526
Tax benefit of options exercised.............. - - 4,085 - 4,085
Two-for-one stock split....................... - 254 - (254) -
Net income.................................... - - - 45,639 45,639
Balance at December 31, 1999...................... 50,800 $ 508 $221,628 $180,908 $403,044
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1999 Annual Report to Shareholders (continued)
Consolidated Statements Of Cash Flows
Years ended December 31,
1999 1998 1997
------------------------------------------
(In thousands)
Operating activities
Net income $ 45,639 $ 30,772 $ 23,143
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Depreciation and amortization....................................... 17,902 12,164 8,276
Provision for doubtful accounts..................................... 961 250 662
Gain on sale of property and equipment.............................. (82) (134) (44)
Deferred income taxes............................................... 5,455 7,629 (1,042)
Common stock contributed to employee benefit plans.................. 2,339 1,629 1,331
Tax benefit of stock options exercised.............................. 4,085 839 301
Postretirement benefits............................................. 12 12 12
Changes in operating assets and liabilities,
net of the effects of the acquisition:
Accounts receivable............................................... 157 (5,809) (1,835)
Amounts receivable from vendors .................................. (1,644) (21,691) (2,100)
Inventory......................................................... (47,912) (53,328) (27,939)
Refundable income taxes........................................... 693 (5,527) 172
Other current assets.............................................. 734 (179) (446)
Other assets...................................................... (1,931) (1,753) (581)
Accounts payable.................................................. (1,852) 20,071 12,425
Accrued expenses.................................................. 3,680 (525) 2,433
Accrued payroll................................................... 1,479 (3,533) 604
Income taxes payable.............................................. - - 2,501
Net cash provided by (used in) operating activities 29,715 (19,113) 17,873
Investing activities
Purchases of property and equipment....................................... (86,002) (57,732) (37,180)
Acquisition, net of cash acquired......................................... - (49,296) -
Proceeds from sale of property and equipment ............................. 7,039 6,038 293
Proceeds from sale of short-term investments.............................. - 500 -
Payments received on notes receivable..................................... 1,265 372 898
Advances made on notes receivable......................................... (70) (650) (1,668)
Net cash used in investing activities.......................... (77,768) (100,768) (37,657)
Financing activities
Borrowings on notes payable to bank....................................... 7,130 5,000 -
Payments on notes payable to bank......................................... (7,130) - -
Proceeds from issuance of long-term debt.................................. 172,892 157,860 20,500
Principal payments on long-term debt...................................... (249,363) (46,651) (1,120)
Net proceeds from secondary offering...................................... 124,570 - -
Net proceeds from issuance of common stock................................ 8,017 3,115 1,482
Net cash provided by financing activities................................. 56,116 119,324 20,862
Net increase (decrease) in cash........................................... 8,063 (557) 1,078
Cash at beginning of year................................................. 1,728 2,285 1,207
Cash at end of year....................................................... $ 9,791 $ 1,728 $ 2,285
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1999 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
O'Reilly Automotive, Inc. (''the Company'') is a specialty retailer and supplier
of automotive aftermarket parts, tools, supplies and accessories to both the
''do-it-yourself'' customer and the professional installer throughout Texas,
Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana, Nebraska and Illinois.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes sales upon shipment of products.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Inventory
Inventory, which consists of automotive hard parts, maintenance items,
accessories and tools, is stated at the lower of cost or market. Cost has been
determined using the last-in, first-out (''LIFO'') method. If the first-in,
first-out (''FIFO'') method of costing inventory had been used by the Company,
inventory would have been $291,077,000 and $246,402,000 as of December 31, 1999
and 1998, respectively.
Amounts Receivable from Vendors
Amounts receivable from vendors consists primarily of amounts due the Company
for changeover merchandise, rebates and other allowances.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided on
straight-line and accelerated methods over the estimated useful lives of the
assets. Service lives for property and equipment generally range from three to
40 years. Leasehold improvements are amortized over the terms of the underlying
leases. Maintenance and repairs are charged to expense as incurred. Upon
retirement or sale, the cost and accumulated depreciation are eliminated and the
gain or loss, if any, is included in the determination of net income as a
component of other income (expense). The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable.
The Company capitalizes interest costs as a component of construction in
progress, based on the weighted average rates paid for long-term borrowings.
Total interest costs capitalized for the years ended December 31, 1999, 1998 and
1997, were $1,134,000, $1,213,000 and $527,000, 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 financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense charged
to operations amounted to $9,428,000, $8,326,000 and $3,437,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Financial Instrument
The Company utilizes interest rate swap agreements to manage interest rate risk
on its floating rate debt. During 1998, the Company entered into an
interest-rate swap agreement to modify the interest characteristics of its
outstanding long-term debt from a floating rate to a fixed rate basis. This
agreement involves the receipt of floating rate amounts in exchange for fixed
rate interest payments over the life of the agreement without an exchange of the
underlying principal amount. The differential to be paid or received is accrued
as interest rates change and recognized as an adjustment to interest expense
related to the debt. The related amount payable to or receivable from the
counterparty is included in other liabilities or assets. The fair value of the
swap agreement is not recognized in the consolidated financial statements and
approximates its carrying cost.
Preopening Costs
Costs associated with the opening of new stores, which consist primarily of
payroll and occupancy costs, are charged to operations as incurred.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 11, the alternative fair value accounting provided for under
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Concentration of Credit Risk
The Company grants credit to certain customers who meet the Company's
pre-established credit requirements. Generally, the Company does not require
security when trade credit is granted to customers. Credit losses are provided
for in the Company's consolidated financial statements and consistently have
been within management's expectations.
The Company has provided long-term financing to a company, through a note
receivable, for the construction of an office building which is leased by the
Company (see Note 7). The note receivable, amounting to $2,137,000 and
$2,203,000 at December 31, 1999 and 1998, respectively, bears interest at 6% and
is due in August 2007.
The carrying value of the Company's financial instruments, including cash,
short-term investments, accounts receivable, accounts payable and long-term
debt, as reported in the accompanying consolidated balance sheets, approximates
fair value.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 2000. The Company does
not anticipate that the adoption of SFAS No. 133 will have a significant effect
on its financial position or results of operations.
NOTE 2-ACQUISITION
Effective January 31, 1998, the Company acquired 100% of the outstanding capital
stock of Hi-Lo Automotive, Inc. and its subsidiaries ("Hi/LO"). Hi/LO was a
specialty retailer supplying automotive aftermarket tools, supplies and
accessories principally throughout Texas and Louisiana. The purchase price was
approximately $49.3 million, including acquisition costs. The purchase price was
financed with long-term borrowings under the Company's credit facility. The
acquisition was accounted for using the purchase method of accounting and
accordingly, the results of operations of Hi/LO have been included in the
Company's results of operations since the date of acquisition. The purchase
price was allocated to assets acquired and liabilities assumed based on their
estimated fair values. The excess of net assets acquired over the purchase
price, which totaled approximately $9.7 million, has been applied as a reduction
to the acquired property and equipment. Additional purchase liabilities recorded
included approximately $5,622,000 for severance and certain costs associated
with the closure and consolidation of certain acquired stores, none of which
remained on the balance sheet at December 31, 1999.
The following unaudited pro forma financial information presents the combined
historical results of the Company and Hi/LO as if the acquisition had occurred
at the beginning of 1998 and 1997 after giving effect to certain adjustments,
including the application of the excess of net assets acquired over the purchase
price to the acquired property and equipment and resulting effect on
depreciation, increased interest expense on long-term debt related to the
acquisition, and the related income tax effects.
1998 1997
(In thousands, except per share data)
Product sales.............................. $634,072 $554,719
Net income................................. $ 29,443 $ 22,782
Net income per share-assuming dilution..... $ 0.68 $ 0.54
The pro forma combined results are not necessarily indicative of the results
that would have occurred if the acquisition had been completed as of the
beginning of each of the years presented, nor are they necessarily indicative of
future consolidated results.
NOTE 3-SHORT-TERM INVESTMENTS
The Company's short-term investments are classified as available-for-sale in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and are carried at cost, which approximates fair market
value. At December 31, 1999 and 1998, short-term investments consisted of
preferred equity securities.
NOTE 4-RELATED PARTIES
The Company leases certain land and buildings related to its O'Reilly Auto Parts
stores under six-year operating lease agreements with O'Reilly Investment
Company and O'Reilly Real Estate Company, partnerships in which certain
shareholders of the Company are partners. Generally, these lease agreements
provide for renewal options for an additional six years at the option of the
Company. Additionally, the Company leases certain land and buildings related to
its 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 7). Rent expense under
these operating leases totaled $2,647,000 in 1999, $2,158,000 in 1998 and
$2,122,000 in 1997.
NOTE 5-NOTE PAYABLE TO BANK
The Company had available a short-term unsecured bank line of credit providing
for maximum borrowings of $5 million, all of which was outstanding at December
31, 1999 and 1998. The line of credit bears interest at LIBOR plus 0.50% (6.70%
at December 31, 1999). The weighted average interest rate for the years ended
December 31, 1999 and 1998 was 6.7% and 6.6%, respectively. The line of credit
expires on June 22, 2000.
NOTE 6-LONG-TERM DEBT
At December 31, 1999, the Company had available a credit facility providing for
maximum borrowings of $165 million. The facility is comprised of a revolving
credit facility of $125 million, and a term loan of $40 million. At December 31,
1998, the Company had available a credit facility providing for maximum
borrowings of $173 million. The facility was comprised of a $125 million
revolving credit facility and a $48 million term loan. At December 31, 1999 and
1998, $61,560,000 and $121,401,000, respectively, of the revolving credit
facility and $40 million and $48 million, respectively, of the term loan were
outstanding. The credit facility, which bears interest at LIBOR plus 0.50%
(6.70% at December 31, 1999), expires in January 2003. Additionally, at December
31, 1998, the Company had outstanding borrowings totaling $7,705,000 under its
non-binding advised line of credit. This line of credit bore interest at 6.6%
and expired during 1999.
During 1999 and 1998, the Company leased certain office equipment under
capitalized leases. Pursuant to the terms of the lease agreements, the Company
has committed to pay approximately $157,000 per month over three years. The
present value of the future minimum lease payments under these agreements
totaled $3,362,000 and $1,496,000 at December 31, 1999 and 1998, respectively,
which has been classified as long-term debt in the accompanying consolidated
financial statements. During 1999, the Company purchased $2,676,000 of assets
under capitalized leases.
Additionally, the Company has various unsecured notes payable to individuals,
amounting to $140,000 and $255,000, at December 31, 1999 and 1998, respectively.
The notes bear interest at rates ranging from 7.75% to 9% and are due in monthly
installments of approximately $6,800 including interest. The notes mature in
varying amounts between 2000 and 2008.
Indirect borrowings under letters of credit provided by a $5,000,000 sublimit of
the revolving credit facility totaled $1,275,000 and $1,990,000 at December 31,
1999 and 1998, respectively. These letters of credit reduced availability of
borrowings at December 31, 1999 and 1998.
Principal maturities of long-term debt for each of the next five years ending
December 31 are as follows (amounts in thousands):
2000 $ 14,358
2001 13,862
2002 76,758
2003 20
2004 13
Thereafter 51
$105,062
Cash paid by the Company for interest during the years ended December 31, 1999,
1998 and 1997 amounted to $6,134,000, $8,509,000 and $642,000, respectively.
NOTE 7-COMMITMENTS
Lease Commitments
During 1999, the Company entered into a Master Lease Agreement with
O'Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the
Company) related to the sale and leaseback of certain properties. The
transaction closed on January 4, 1999, with a purchase price of approximately
$5.5 million. The lease calls for an initial term of 15 years with two five-year
renewal options.
The Company leases certain office space, retail stores, property and equipment
under long-term, noncancelable operating leases. Most of these leases include
renewal options and some include options to purchase and provisions for
percentage rent based on sales. Future minimum rental payments, including
commitments of $1,499,000 per year through 2004 in connection with the
related-party leases described in Note 4, for each of the next five years ending
December 31 and in the aggregate are as follows (amounts in thousands):
2000 $14,894
2001 13,525
2002 11,921
2003 9,820
2004 8,614
Thereafter 37,036
$95,810
Rental expense amounted to $14,122,000, $13,862,000 and $4,136,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Other Commitments
During January 2000, the Company announced that it had entered into a definitive
agreement to purchase the assets of Gateway Auto Supply ("Gateway"),
headquartered in Fort Worth, Texas. Gateway is a specialty retailer of auto
parts and accessories that operates 14 stores in Texas. Under the terms of the
agreement, the Company will purchase the inventory, fixtures and certain other
assets of Gateway for approximately $5 million in cash. The Company will not
assume any liabilities of Gateway. It is expected that the transaction will
close in April 2000.
The Company also had construction commitments, which totaled approximately $29.7
million, at December 31, 1999.
NOTE 8-LEGAL PROCEEDINGS
The Company is currently involved in litigation as a result of a complaint filed
against Hi/LO in May 1997. The plaintiff in this lawsuit sought to certify a
class action on behalf of persons or entities in the states of Texas, Louisiana
and California that have purchased a battery from Hi/LO since May 1990. The
complaint alleges that Hi/LO offered and sold ''old,'' ''used'' and ''out of
warranty'' batteries as if the batteries were new, resulting in claims for
violations of deceptive trade practices, breach of contract, negligence, fraud,
negligent misrepresentation and breach of warranty. The plaintiff is seeking, on
behalf of the class, an unspecified amount of compensatory and punitive damages,
as well as attorneys' fees and pre- and post-judgment interest. On July 27,
1998, the Trial Court certified this class. The Company appealed the decision to
certify the class in the Court of Appeals for the Ninth District of Texas. On
February 25, 1999, the Court of Appeals issued an opinion affirming the Trial
Court's decision to certify the class. At that time, the Company appealed the
opinion by seeking a mandamus from the Supreme Court of Texas. On April 6, 1999,
the Supreme Court of Texas asked the plaintiff to file a response, which was
filed on April 14, 1999. On May 3, 1999, the Company filed a reply to that
response. To date, the Company has heard nothing further from the Texas Supreme
Court. The Company believes that the accusations made in this case are
unfounded, and intends to defend this lawsuit vigorously. Although it is
difficult at this stage to determine the likely outcome of the case, the Company
believes that this lawsuit will not have a material adverse effect on the
Company's consolidated results of operations or financial position.
In addition, 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.
NOTE 9-INTEREST RATE RISK MANAGEMENT
The Company entered into an interest rate swap agreement to effectively convert
a portion of its floating rate long-term debt to a fixed rate basis, thereby
reducing the impact of interest rate changes on future income. Pursuant to this
pay-fixed swap agreement, the Company agreed to exchange, at specified
intervals, the difference between the fixed and the floating interest amounts
calculated on the notional amount of the swap agreement which totaled $50
million and $100 million, respectively, at December 31, 1999 and 1998. The
Company's fixed interest rate under the swap agreement was 5.66% and the
counterparty's floating rate was 6.20% at December 31, 1999.
NOTE 10-EMPLOYEE BENEFIT PLANS
The Company sponsors a contributory profit sharing and savings plan that covers
substantially all employees who are 21 years of age with at least six months of
service. Employees may contribute up to 15% of their annual compensation subject
to Internal Revenue Code maximum limitations. The Company has agreed to make
matching contributions equal to 50% of the first 2% of each employee's
contribution and 25% of the next 2% of each employee's contribution. Additional
contributions to the plan may be made as determined annually by the Board of
Directors. After three years of service, Company contributions and earnings
thereon vest at the rate of 20% per year of service with the Company. Company
contributions charged to operations amounted to $2,618,000 in 1999, $1,818,000
in 1998 and $1,485,000 in 1997. Company contributions, in the form of common
stock, to the profit sharing and savings plan to match employee contributions
during the years ended December 31 were as follows:
Year Market
Contributed Shares Value
1999 29,481 $658,000
1998 31,438 514,000
1997 41,826 415,000
Profit sharing contributions accrued at December 31, 1999, 1998 and 1997 were
funded in the next year through issuance of shares of the Company's common stock
as follows:
Year Market
Funded Shares Value
1999 60,64 $1,300,000
1998 72,386 1,070,000
1997 99,080 884,000
The Company also sponsors an unfunded noncontributory defined benefit health
care plan, which provides certain health benefits to retired employees.
According to the terms of this plan, retirees' annual benefits are limited to
$1,000 per employee starting at age 66 for employees with 20 or more years of
service. Postretirement benefit costs for each of the years ended December 31,
1999, 1998 and 1997 amounted to $12,000.
NOTE 10-EMPLOYEE BENEFIT PLANS (CONTINUED)
Additionally, the Company has adopted a stock purchase plan under which
1,000,000 shares of common stock are reserved for future issuance. Under the
plan, substantially all employees and non-employee directors have the right to
purchase shares of the Company's common stock monthly at a price equal to 85% of
the fair market value of the stock. Under the plan, 78,927 shares were issued at
an average price of $18.90 per share during 1999, 74,632 shares were issued at
an average price of $15.05 per share during 1998, and 65,168 shares were issued
at an average price of $8.75 per share during 1997.
The Company has in effect a performance incentive plan for the Company's senior
management under which 400,000 shares of restricted stock are reserved for
future issuance. Under the plan, 6,796 shares, 5,358 shares and 2,772 shares
were issued during 1999, 1998 and 1997, respectively.
NOTE 11-STOCK OPTION PLANS
The Company has a stock option plan under which incentive stock options or
nonqualified stock options may be granted to officers and key employees. An
aggregate of 6,000,000 shares of common stock is reserved for future issuance
under this plan. The exercise price of options granted shall not be less than
the fair market value of the stock on the date of grant and the options will
expire no later than 10 years from the date of grant. Options granted pursuant
to the plan become exercisable no sooner than six months from the date of grant.
In the case of a shareholder owning more than 10% of the outstanding stock of
the Company, the exercise price of an incentive option may not be less than 110%
of the fair market value of the stock on the date of grant, and such options
will expire no later than 10 years from the date of grant. Also, the aggregate
fair market value of the stock with respect to which incentive stock options are
exercisable for the first time by any individual in any calendar year may not
exceed $100,000. A summary of outstanding stock options is as follows:
Number
Price per Share of Shares
Outstanding at December 31, 1996.......... $ 4.38 - 10.00 1,317,400
Granted................................. 7.82 - 14.00 1,510,000
Exercised............................... 4.38 - 9.19 (143,000)
Canceled................................ 4.38 - 8.94 (12,000)
Outstanding at December 31, 1997.......... 4.38 - 14.00 2,672,400
Granted................................. 12.38 - 22.91 823,750
Exercised............................... 4.38 - 16.07 (238,600)
Canceled................................ 4.38 - 20.88 (68,700)
Forfeitures............................. 4.38 (5,000)
Outstanding at December 31,1998........... 6.07 - 22.91 3,183,850
Granted................................. 18.44 - 26.75 1,148,000
Exercised............................... 5.94 - 18.75 (948,620)
Canceled................................ 6.75 - 26.38 (35,750)
Forfeitures............................. 6.07 (1,000)
Outstanding at December 31,1999........... $ 6.07 - 26.75 3,346,480
Options to purchase 394,230, 855,100 and 1,043,400 shares of common stock were
exercisable at December 31, 1999, 1998 and 1997, respectively.
The Company also maintains a stock option plan for non-employee directors of the
Company under which 300,000 shares of common stock are reserved for future
issuance. All director stock options are granted at fair market value on the
date of grant and expire on the earlier of termination of service to the Company
as a director or seven years. Options granted under this plan become exercisable
six months from the date of grant. A summary of outstanding stock options is as
follows:
Number
Price per Share of Shares
Outstanding at December 31, 1996.......... $ 4.38 - 9.09 80,000
Granted................................. 9.28 -10.44 30,000
Exercised............................... 4.38 - 9.09 (40,000)
Canceled................................ 9.28 (10,000)
Outstanding at December 31, 1997.......... 4.38 -10.44 60,000
Granted................................. 13.50 20,000
Exercised............................... 4.38 (10,000)
Canceled................................ -- --
Outstanding at December 31,1998........... 6.56 -13.50 70,000
Granted................................. 23.91 20,000
Exercised............................... -- --
Canceled................................ -- --
Outstanding at December 31,1999........... $6.56 -23.91 90,000
All options under this plan were exercisable at December 31, 1999, 1998 and
1997.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee and non-employee director stock options under the fair value method of
that SFAS.
The fair values for these options were estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of
6.54%, 4.74% and 5.53%; volatility factors of the expected market price of the
Company's common stock of .247, .221, .200; and weighted-average expected life
of the options of 8.0, 8.0 and 6.4 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, 1999, 1998 and 1997 were
$10.22, $6.44 and $4.14, respectively. The weighted-average remaining
contractual life at December 31, 1999, for all outstanding options under the
Company's stock option plans is 7.48 years. The weighted-average exercise price
for all outstanding options under the Company's stock option plans was $16.15 at
December 31, 1999.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing model does not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The effects of
applying SFAS No. 123 for pro forma disclosures are not likely to be
representative of the effects on reported net income or losses for future years.
The Company's pro forma information follows:
1999 1998 1997
(In thousands, except per share data)
Pro forma net income.......................... $43,501 $29,242 $22,432
Pro forma basic net income per share.......... $ 0.89 $ 0.69 $ 0.54
Pro forma net income per share-
assuming dilution........................... $ 0.88 $ 0.67 $ 0.53
NOTE 12-INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted income per
common share:
Years ended December 31,
1999 1998 1997
(In thousands, except per share data)
Numerator (basic and diluted):
Net income................................................. $45,639 $30,772 $23,143
Denominator:
Denominator for basic income per common share-
weighted-average shares................................. 48,674 42,476 42,086
Effect of employee stock options (Note 11)................. 1,041 728 468
Denominator for diluted income per common share-
Adjusted weighted-average shares and
assumed conversion.................................... 49,715 43,204 42,554
Basic net income per common share............................... $ 0.94 $ 0.72 $ 0.55
Net income per common share-assuming dilution................... $ 0.92 $ 0.71 $ 0.54
NOTE 13-INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows at December 31:
1999 1998
(In thousands)
Deferred tax assets:
Current:
Allowance for doubtful accounts........ $ 226 $ 225
Vacation accrual....................... 914 852
Other accruals......................... 2,672 3,031
3,812 4,108
Noncurrent:
Property and equipment................. -- 1,843
Other.................................. 1,306 1,335
1,306 3,178
Total deferred tax assets...... 5,118 7,286
Deferred tax liabilities:
Current:
Inventory carrying value............... 2,036 1,270
Noncurrent:
Property and equipment................. 2,521 --
Total deferred tax liabilities 4,557 1,270
Net deferred tax assets $ 561 $ 6,016
The provision for income taxes consists of the following:
Current Deferred Total
(In thousands)
1999:
Federal............ $ 19,934 $ 4,959 $ 24,885
State.............. 1,996 496 2,500
$ 21,930 $ 5,455 $ 27,385
1998:
Federal............ $ 10,386 $ 6,852 $ 17,238
State.............. 1,156 777 1,933
$ 11,542 $ 7,629 $ 19,171
1997:
Federal............ $ 13,562 $ (915) $ 12,647
State.............. 1,893 (127) 1,766
$ 15,455 $ (1,042) $ 14,413
A reconciliation of the provision for income taxes to the amounts computed at
the federal statutory rate is as follows:
1999 1998 1997
(In thousands)
Federal income taxes at statutory rate........... $ 25,558 $ 17,480 $ 13,145
State income taxes, net of federal tax benefit... 1,625 1,256 1,148
Other items, net................................. 202 435 120
$ 27,385 $ 19,171 $ 14,413
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, 1999, 1998 and 1997, cash paid by the
Company for income taxes amounted to $17,151,000, $16,229,000 and $12,168,000,
respectively.
NOTE 14-STOCK SPLIT
On November 8, 1999, the Company's Board of Directors declared a two-for-one
stock split to be effected in the form of a 100% stock dividend payable to all
shareholders of record as of November 15, 1999. The stock dividend was paid on
November 30, 1999. Accordingly, this stock split has been recognized by
reclassifying $254,000, the par value of the additional shares resulting from
the split, from retained earnings to common stock.
All share and per share information included in the accompanying consolidated
financial statements has been restated to reflect the retroactive effect of the
stock split for all periods presented.
NOTE 15-PUBLIC OFFERING OF COMMON STOCK
In March 1999, the Company completed a secondary public offering of 3,501,000
shares (pre-stock split) of common stock. Pursuant to this offering, the Company
issued 3,501,000 shares of common stock resulting in net proceeds to the Company
of $124,570,000. A portion of the proceeds was used to repay the Company's
outstanding indebtedness under its bank credit facilities. The remaining portion
of the proceeds was used to fund the Company's expansion.
NOTE 16-QUARTERLY FINANCIAL DATA-UNAUDITED
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Year ended December 31, 1999
Product sales $ 166,404 $ 196,107 $ 208,401 $ 183,210
Gross profit 70,957 81,823 88,001 84,509
Operating income 16,241 19,630 22,231 18,818
Net income 8,603 11,769 13,412 11,855
Basic net income per share 0.20 0.23 0.26 0.23
Net income per share-assuming dilution 0.20 0.23 0.26 0.23
Year ended December 31, 1998
Product sales $ 118,269 $ 165,242 $ 172,784 $ 160,007
Gross profit 50,669 66,201 69,345 71,648
Operating income 10,602 13,745 15,435 17,119
Net income 5,819 7,672 8,361 8,920
Basic net income per share 0.14 0.18 0.20 0.21
Net income per share-assuming dilution 0.14 0.18 0.19 0.20
The above quarterly financial data is unaudited, but in the opinion of
management, all adjustments necessary for a fair presentation of the selected
data for these interim periods presented have been included.
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1999 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, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Kansas City, Missouri
February 29, 2000
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 21.1 - Subsidiaries of the Company
Subsidiary State of Incorporation
Ozark Automotive Distributors, Inc. Missouri
Greene County Realty Co. Missouri
O'Reilly II Aviation, Inc. Missouri
Hi-Lo Automotive, Inc. Delaware
One hundred percent of the capital stock of each of the above listed
subsidiaries is directly owned by O'Reilly Automotive, Inc.
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 29,
2000, included in the 1999 Annual Report to Shareholders of O'Reilly Automotive,
Inc.
Our audits also included the financial statement schedule of O'Reilly
Automotive, Inc. and Subsidiaries listed in Item 14(a). This schedule is the
responsibility of the company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-73377, Form S-8 No. 33-61632, Form S-8 No. 33-73892 and Form
S-8 No. 33-91022) of O'Reilly Automotive, Inc. of our report dated February 29,
2000 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, 1999.
ERNST & YOUNG LLP
Kansas City, Missouri
March 30, 2000