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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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file number 0-21318
O'REILLY AUTOMOTIVE, INC.
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(Exact name of registrant as specified in its charter)
Missouri 44-0618012
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
233 South Patterson
Springfield, Missouri 65802
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(Address of principal executive offices, zip code)
(417) 862-6708
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained here, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
At February 28, 2001, an aggregate of 51,618,936 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
$977,533,600 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
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Portions of the Annual Shareholders' Report for the Year
Ended December 31, 2000 Parts II and IV
Proxy Statement for 2001 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
Forward Looking Information
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, 2000, we operated 672 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 our business. These risk factors include, among others, risks
related to competition in the automotive aftermarket business, our growth
strategy, our acquisition strategy, our sensitivity to regional economic and
weather conditions, our dependence upon key and other personnel and the
significant voting control held by our principal shareholders.
Competitive Advantages
Proven Ability to Execute Dual Market Strategy. We have an established
track record of serving both do-it-yourself ("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 geo-
graphic 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.
2
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. Prior to our acquisition of Hi-Lo Automotive, Inc. ("Hi/LO"), Hi/Lo
derived approximately 65% of its sales from DIY customers and approximately 35%
from professional installers. For 2000, we derived approximately 57% of our
product sales from our DIY customers and approximately 43% from our professional
installer customers. As a result of our historical success in executing our dual
market strategy and our over 106 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 pro-
ficient store personnel ("Professional Parts People") using advanced
point-of-sale systems;
o an extensive selection of products; o attractive stores in conve-
nient 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 seven 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 eight consecutive
years of record revenues and earnings growth. We have a strong senior management
team comprised of 40 professionals who average 19 years of experience with
O'Reilly. In addition, our 70 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 120 stores in
2001 and approximately 145 stores in 2002. All of the sites for our proposed
2001 store openings and a majority of the sites for our proposed 2002 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.
3
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 101 net new stores opened in 2000, 63 are located in Texas,
13 are located in Iowa, 3 in Nebraska, 8 in Louisiana, 10 in Arkansas, and 4 in
Oklahoma. 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.
4
Continually Enhance Store Design and Location. Our current prototype store
design features enhancements such as greater square footage, higher ceilings,
more convenient interior store layouts, brighter lighting, increased parking
availability and dedicated counters to serve professional installers, each
designed to increase product sales and operating efficiencies and enhance
customer service. We continually update the location and condition of our store
network through systematic renovation and relocation of our existing stores to
conform with our prototype store design. We believe that our ability to
consistently achieve growth in same store product sales is due in part to our
commitment to maintaining an attractive store network, which is strategically
located to best serve our customers.
Products and Purchasing
Our stores offer DIY and professional installer customers a wide selection
of brand name and private label products for domestic and imported automobiles,
vans and trucks. We do not sell tires or perform automotive repairs or
installations. Our merchandise generally consists of nationally recognized,
well-advertised, name brand products such as AC Delco, Moog, 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) 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
2000. Our largest vendor in 2000 accounted for approximately 5% 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:
State Number
of Stores
Texas 271
Missouri 116
Oklahoma 95
Kansas 51
Iowa 55
Louisiana 30
Arkansas 31
Nebraska 22
Illinois 1
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Total 672
====
5
Our stores on average carry approximately 23,000 SKUs and average
approximately 6,700 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 43 Master Inventory Stores, which
on average carry approximately 37,000 SKUs and average approximately 8,700
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.
6
Distribution System
The following table sets forth the distribution centers we currently
operate:
Number of
Location Square Footage Stores Served
Houston, TX 424,825 207
Springfield, MO 253,500 115
Oklahoma City, OK 257,700 112
Dallas, TX 316,521 94
Des Moines, IA 148,395 78
Kansas City, MO 128,064 66
Little Rock, AR 89,852 -
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. We also operate a 22,500 square foot bulk
warehouse in McAllen, Texas, that serves the surrounding distribution centers
with bulk motor oil.
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 2001 we plan to:
o initiate full utilization of the Little Rock and Dallas distribution
centers to be served by all stores in those surrounding areas
o implement improvement plans to increase inventory turnover in all dis-
tribution centers
o finalize implementation of a new warehouse management system in the Des
Moines and Oklahoma City 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 seven nationally televised races
and over 50 motorsports races and car shows at over 65 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.
7
Marketing to the Professional Installer. We have over 106 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 three.
Of the approximately 62 independently owned parts stores currently
purchasing Automotive Products from Ozark, 60 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 67 members as
of December 31, 2000, 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 70 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.
8
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 19 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.
9
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, 2000, we had 8,937 full-time team members and 1,871
part-time team members, of whom 8,125 were employed at our stores, 1,914 were
employed at our distribution centers and 769 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), and Master 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 that could have a material adverse effect on our operations. We
can not give any assurance, however, that we will not incur significant expenses
in the future in order to comply with any such law or regulation.
10
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 2001 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 certain assets of Gateway Auto Supply in April 2000, KarPro
Auto Parts in October 2000, and Rankin Automotive Group in November 2000. We
expect to continue to make acquisitions as an element of our growth strategy.
Acquisitions involve certain risks that could cause our actual growth to differ
from our expectations. For example: (1) we may not be able to continue to
identify suitable acquisition candidates or to acquire additional companies at
favorable prices or on other favorable terms; (2) our management's attention may
be distracted; (3) we may fail to retain key acquired personnel; (4) we may
assume unanticipated legal liabilities and other problems; and (5) we may not be
able to successfully integrate the operations (accounting and billing functions,
for example) of businesses we acquire to realize economic, operational and other
benefits.
Sensitivity to Regional Economic and Weather Conditions
All of our stores are located in the Central and Southern United States.
In particular, approximately 40% 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.
11
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 2001 Annual Meeting of Shareholders, a portion
of which is incorporated herein.
Significant Voting Control is held by the O'Reilly Family
As of the date of this Form 10-K the O'Reilly family beneficially owns
approximately 19.2% 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.
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.
12
Item 2. Properties
The following table provides certain information regarding our
administrative offices and distribution centers and offices as of December 31,
2000:
Square
Location Principal Uses(s) Footage Interest
Springfield, MO Distribution Center and Corporate Offices 274,920 Owned
Springfield, MO Corporate Offices, Training and Technical Center 35,580 Leased (a)
Springfield, MO Corporate Offices 32,060 Leased (b)
Kansas City, MO Distribution Center and Offices 130,654 Owned
Oklahoma City, OK Distribution Center and Offices 263,640 Owned
Des Moines, IA Distribution Center and Offices 156,720 Owned
Houston, TX Distribution Center and Offices 446,105 Owned
Dallas, TX Distribution Center and Offices 338,140 Owned
Little Rock, AR Distribution Center and Offices 97,052 Leased (c)
- ----------
(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.
(c) Occupied under the terms of a lease with an unaffiliated party expiring
September 30, 2005, subject to renewal for three five-year terms at our
option.
Of the 672 stores that we operated at December 31, 2000, 225 stores were
owned, 385 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 27 stores
leased from unaffiliated parties expire prior to the end of 2001. 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,
13
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. On June 6, 2000, the
Supreme Court of Texas denied the appeal for a mandamus. On January 15, 2001, we
reached a favorable verbal settlement with the plaintiffs' counsel. The
settlement documents are currently being prepared and will be subject to the
approval of the Trial Court. We believe that this lawsuit will not have a
material adverse effect on our consolidated financial position, results of
operations or cash flows.
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 flows.
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, 2000.
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 50, Co-President, has been an O'Reilly team member for 30
of his 50 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 40, 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 38, 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
Common Stock Market Prices and Dividends on page 36 of the Annual Shareholders'
Report for the year ended December 31, 2000, under the captions, "Market Prices
and Dividend Information" and "Number of Shareholders," are incorporated herein
by reference.
14
Item 6. Selected Financial Data
Selected Financial Data on pages 13 and 14 of the Annual Shareholders' Report
for the year ended December 31, 2000, under the caption "Selected Consolidated
Financial Data," is incorporated herein by reference.
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 15 through 19 of the Annual Shareholders' Report for the
year ended December 31, 2000, under the caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," is incorporated
herein by 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, on pages 20 through 33 of the
Annual Shareholders' Report for the year ended December 31, 2000, under the
captions, "Consolidated Financial Statements," "Notes to Consolidated Financial
Statements" and "Report of Independent Auditors," are incorporated herein 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 2001 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.
15
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, 2000, are incorporated here by
this reference in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for the years ended December 31, 2000,
1999, and 1998
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the years ended December 31,2000,
1999, and 1998
Notes to Consolidated Financial Statements for the years ended December 31,
2000, 1999, and 1998
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, 2000.
(c) Exhibits
See Exhibit Index.
(d) Financial Statement Schedules
16
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
- ----------------------------------------- ------------- -------------- --------------- ---------------- -------------
(Amounts in thousands)
Year ended December 31, 2000:
Deducted from asset account:
Allowance for doubtful accounts $ 681 $1,235 $ 0 $1,781(1) $ 135
Inventory reserve 53 0 0 53(3) 0
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
- ----------
(1) Uncollectible accounts written off.
(2) Reserves assumed upon acquisition of Hi/LO.
(3) Inventory acquired from Hi/LO written off.
17
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, 2001
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 March 30, 2001
- ------------------------------------ the Board and Chief
David E. O'Reilly Executive Officer
(principal executive officer)
/s/Lawrence P. O'Reilly Director, Co-Chairman of March 30, 2001
- ------------------------------------ Chief Operating Officer
Lawrence P. O'Reilly
/s/Charles H. O'Reilly, Jr, Director and Vice- March 30, 2001
- ------------------------------------ Chairman of the Board
Charles H. O'Reilly, Jr.
/s/Rosalie O'Reilly Wooten Director and Executive March 30, 2001
- ------------------------------------ Vice-President
Rosalie O'Reilly Wooten
/s/ Charles H. O'Reilly, Sr. Director and March 30, 2001
- ------------------------------------ Chairman Emeritus
Charles H. O'Reilly, Sr.
/s/Ted F. Wise Co-President March 30, 2001
- ------------------------------------
Ted F. Wise
/s/Greg Henslee Co-President March 30, 2001
- ------------------------------------
Greg Henslee
/s/James R. Batten Vice-President of March 30, 2001
- ------------------------------------ Finance
James R. Batten Chief Financial Officer
and Treasurer
(principal financial officer)
/s/ Jay D. Burchfield Director March 30, 2001
- ------------------------------------
Jay D. Burchfield
/s/ Joe C. Greene Director March 30, 2001
- ------------------------------------
Joe C. Greene
/s/ Paul R. Lederer Director March 30, 2001
- ------------------------------------
Paul R. Lederer
18
EXHIBIT INDEX
Exhibit
Number Description
2.1* Plan of Reorganization Among the Registrant, Greene County Realty
Co.("Greene County Realty") and Certain Shareholders.
2.2 Agreement and Plan of Merger, dated as of December 23, 1997, by and
among O'Reilly Automotive, Inc., Shamrock Acquisition, Inc. and
Hi/LO Automotive, Inc., filed as Exhibit (c)(1) to the Registrant's
Tender Offer Statement on Schedule 14D-1 dated December 23, 1997,
are incorporated here by this reference.
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,
filed as Exhibit 3.3 to the Registrant's quarterly report on
Form 10-Q for the quarter ended September 30,1999, are incorporated
here by this reference.
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, is incorporated here by this reference.
10.7(a) O'Reilly Automotive, Inc. Profit Sharing and Savings Plan, filed as
Exhibit 4.1 to the Registrant's Registration Statement on Form S-8,
File No. 33-73892, is incorporated 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 Regi-
strant and Deck Enterprises, filed as Exhibit 10.13 to the Regi-
strant's Annual Shareholders' Report on Form 10-K for the year ended
December 31, 1993, are incorporated here by this reference.
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, is incorporated here by this
reference.
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, is incorporated here by this reference.
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, is incorporated here
by this reference.
19
EXHIBIT INDEX (continued)
10.17(a) Second Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, filed as Exhibit 10.20 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, is incorporated here
by this reference.
10.18 Credit Agreement between the Registrant and NationsBank, N.A., dated
October 16, 1997, filed as Exhibit 10.17 to the Registrant's Quar-
terly Report on Form 10-Q for the quarter ended September 30, 1997,
is incorporated here by this reference.
10.19 Credit Agreement between the Registrant and NationsBank, N.A., dated
January 27, 1998, filed as Exhibit 10.20 to the Registrant's Quar-
terly Report on Form 10-Q for the quarter ended March 31, 1998, is
incorporated here by this reference.
10.20(a) Third Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option
Plan, filed as Exhibit 10.21 to the Registrant's Amended Quarterly
Report on Form 10-Q/A for the quarter ended March 31, 1998, is in-
corporated here by this reference.
10.21(a) First Amendment to the O'Reilly Automotive, Inc. Directors' Stock
Option Plan, filed as Exhibit 10.22 to the Registrant's Amended
Quarterly Report on Form 10-Q/A for the quarter ended March 31,
1998, is incorporated here by this reference.
10.22(a) O'Reilly Automotive, Inc. Deferred Compensation Plan, filed as Ex-
hibit 10.23 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, is incorporated here by this
reference.
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, is incorporated here by this reference.
13.1 Portions of the 2000 Annual Report to Shareholders, filed herewith.
21.1 Subsidiaries of the Registrant, filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors, filed herewith.
- --------------------
* 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.
20
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders
Selected Consolidated Financial Data
Years ended December 31, 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
INCOME STATEMENT DATA:
Product sales $890,421 $754,122 $616,302 $316,399 $259,243 $201,492 $167,057 $137,164 $110,147 $ 94,937
Cost of goods sold, including
warehouse and distribution
expenses 507,720 428,832 358,439 181,789 150,772 116,768 97,758 82,102 65,066 56,255
---------------------------------------------------------------------------------------------------
Gross profit 382,701 325,290 257,863 134,610 108,471 84,724 69,299 55,062 45,081 38,682
Operating, selling, general and
administrative expenses 292,672 248,370 200,962 97,526 79,620 62,687 52,142 42,492 35,204 29,961
---------------------------------------------------------------------------------------------------
Operating income 90,029 76,920 56,901 37,084 28,851 22,037 17,157 12,570 9,877 8,721
Other income (expense), net (6,870) (3,896) (6,958) 472 1,182 236 376 216 204 (104)
Provision for income taxes 31,451 27,385 19,171 14,413 11,062 8,182 6,461 4,556 3,686 3,167
---------------------------------------------------------------------------------------------------
Income from continuing
operations before cumulative
effects of changes in
accounting principles 51,708 45,639 30,772 23,143 18,971 14,091 11,072 8,230 6,395 5,450
Cumulative effects of changes in
accounting principles - - - - - - - - (163) -
---------------------------------------------------------------------------------------------------
Income from continuing
operations 51,708 45,639 30,772 23,143 18,971 14,091 11,072 8,230 6,232 5,450
Income (loss) from discontinued
operations - - - - - - - 48 129 (68)
---------------------------------------------------------------------------------------------------
Net income $ 51,708 $ 45,639 $ 30,772 $ 23,143 $ 18,971 $ 14,091 $ 11,072 $ 8,278 $ 6,361 $ 5,382
===================================================================================================
Basic Earnings Per Common Share:
Income per share from continuing
operations before cumulative
effects of changes in accounting
principles $ 1.01 $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40 $ 0.32 $ 0.25 $ 0.22 $ 0.19
---------------------------------------------------------------------------------------------------
Income per share from continuing
operations $ 1.01 $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40 $ 0.32 $ 0.25 $ 0.21 $ 0.19
Income per share from
discontinued operations - - - - - - - - 0.01 -
---------------------------------------------------------------------------------------------------
Net income per share $ 1.01 $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40 $ 0.32 $ 0.25 $ 0.22 $ 0.19
===================================================================================================
Weighted average common shares
outstanding 51,168 48,674 42,476 42,086 41,728 35,640 34,620 32,940 29,436 29,308
===================================================================================================
Earnings Per Common Share -
Assuming Dilution:
Income per share from continuing
operations before cumulative
effects of changes in
accounting principles $ 1.00 $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39 $ 0.32 $ 0.25 $ 0.22 $ 0.19
===================================================================================================
Income per share from
continuing operations $ 1.00 $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39 $ 0.32 $ 0.25 $ 0.21 $ 0.19
Income per share from
discontinued operations - - - - - - - - 0.01 -
---------------------------------------------------------------------------------------------------
Net income per share $ 1.00 $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39 $ 0.32 $ 0.25 $ 0.22 $ 0.19
===================================================================================================
Weighted average common
shares outstanding -
adjusted(e) 51,728 49,715 43,204 42,554 42,064 35,804 34,778 33,046 29,436 29,308
===================================================================================================
21
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Selected Consolidated Financial Data (continued)
Years ended December 31, 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
SELECTED OPERATING DATA:
Number of stores at
year-end(a) 672 571 491 259 219 188 165 145 127 116
Total store square footage
at year-end (in 000's)(b) 4,491 3,777 3,172 1,454 1,155 923 785 671 571 511
Weighted-average product
sales per store
(in 000's)(b) $ 1,412 $ 1,423 $ 1,368 $ 1,306 $ 1,239 $ 1,101 $ 1,007 $ 949 $ 838 $ 759
Weighted-average product
sales per square foot(b)(f) $ 212.6 $ 216.5 $ 238.0 $ 235.8 $ 242.2 $ 227.3 $ 215.4 $ 208.7 $ 187.2 $ 174.4
Percentage increase in same-
store product sales open
two full periods(c) 4.0% 9.6% 6.8% 6.8% 14.4% 8.9% 8.9% 14.9% 11.4% 9.2%
Percentage increase in
same-store product sales
open one year(d) 5.0%
BALANCE SHEET DATA:
Working capital $296,272 $249,351 $208,363 $ 93,763 $ 74,403 $ 80,471 $ 41,416 $ 41,193 $ 15,251 $ 13,434
Total assets 715,995 610,442 493,288 247,617 183,623 153,604 87,327 73,112 58,871 49,549
Short-term debt 49,121 19,358 13,691 130 3,154 231 311 495 3,462 1,298
Long-term debt,
less current portion 90,463 90,704 170,166 22,641 237 358 461 732 2,668 3,326
Long-term debt related
to discontinued
operations, less current
portion - - - - - - - - 9,873 10,316
Shareholders' equity 463,731 403,044 218,394 182,039 155,782 133,870 70,224 57,805 29,281 22,881
- ----------
(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, one was closed in 1998 and one was closed in
2000. 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) Beginning January 2000, same-store product sales data are calculated based
on the change in product sales of stores open at least one year. 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.
(e) There was no additional dilution until 1993 when options were first granted.
(f) 1998 does not include stores acquired from Hi/LO. Consolidated weighted
average product sales per square foot were $207.3.
22
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 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.
Beginning in January 2000, we calculate same-store product sales based on
the change in product sales for stores open at least one year. We also 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 both 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 team members, 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,
--------------------------
2000 1999 1998
Product sales............................................. 100.0% 100.0% 100.0%
Cost of goods sold, including warehouse and
distribution expenses............................. 57.0 56.9 58.2
---------------------------------------------------
Gross profit 43.0 43.1 41.8
Operating, selling, general and administrative
expenses............................................ 32.9 32.9 32.6
--------------------------------------------------
Operating income......................................... 10.1 10.2 9.2
Other expense, net....................................... (0.8) (0.5) (1.1)
--------------------------------------------------
Income before income taxes............................... 9.3 9.7 8.1
Provision for income taxes............................... 3.5 3.6 3.1
--------------------------------------------------
Net income............................................... 5.8% 6.1% 5.0%
==================================================
23
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
2000 Compared to 1999
Product sales increased $136.3 million, or 18.1% from $754.1 million in
1999 to $890.4 million in 2000, due to 101 net additional stores opened during
2000, and a $28.0 million, or 4.0% increase in same-store product sales for
stores opened in both full periods. We believe that the increased product sales
achieved by the existing stores are the result of our offering of a broader
selection of products in most stores, an increased promotional and advertising
effort through a variety of media and localized promotional events, and
continued improvement in the merchandising and store layouts of most stores.
Also, our continued focus on serving professional installers contributed to
increased sales.
Gross profit increased 17.6% from $325.3 million (or 43.1% of product
sales) in 1999 to $382.7 million (or 43.0% of product sales) in 2000.
Operating, selling, general and administrative expenses increased $44.3
million from $248.4 million (or 32.9% of product sales) in 1999 to $292.7
million (or 32.9% of product sales) in 2000. The increase in these expenses in
dollar amount was primarily attributable to increased salaries and benefits,
rent and other costs associated with the addition of employees and facilities to
support the increased level of our operations.
Other expense, net, increased by $3.0 million from $3.9 million in 1999 to
$6.9 million in 2000. The increase was primarily due to interest expense on
increased borrowings under our credit facility.
Provision for income taxes increased from $27.4 million in 1999 (37.5%
effective tax rate) to $31.5 million in 2000 (37.8% effective tax rate). The
increase in the dollar amount was primarily due to the increase of income before
income taxes. The nominal increase in the effective tax rate was primarily due
to changes in the apportionment of sales between states with differing tax
rates.
Principally as a result of the foregoing, net income in 2000 was $51.7
million (or 5.8% of product sales), an increase of $6.1 million (or 13.3%) from
net income in 1999 of $45.6 million (or 6.1% of product sales).
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 are the
result of our offering of a broader selection of products in most stores, an
increased promotional and advertising effort through a variety of media and
localized promotional events, and continued improvement in the merchandising and
store layouts of most stores. Also, our continued focus on serving professional
installers contributed to increased 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 employee 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 employees and facilities to support the increased
level of our operations.
24
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
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).
Liquidity and Capital Resources
Net cash provided by operating activities was $5.8 million in 2000 and
$29.7 million in 1999. Net cash used in operating activities was $19.1 million
in 1998. The decrease in cash provided by operating activities in 2000 compared
to 1999 is the result of an increase in inventory and to a lesser extent,
increases in accounts receivable and amounts receivable from vendors, partially
offset by increases in net income, accounts payable and accrued payroll. The
increase in net cash provided by operating activities in 1999 compared to 1998
is the result of increases in net income, accrued payroll, other current
liabilities and a larger tax benefit resulting from stock option exercises,
offset by increases in amounts receivable from vendors and inventory.
Net cash used in investing activities was $40.5 million in 2000, $77.8
million in 1999 and $100.8 million in 1998. The decrease in cash used in 2000
was primarily due to the sale of 90 properties for $52 million in a
sale-leaseback transaction. 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.
The increase in cash used in 1998 was primarily due to the purchase of Hi/LO and
increased capital expenditures.
On December 29, 2000, we completed a sale-leaseback transaction. Under the
terms of the transaction, we sold 90 properties, including land, buildings and
improvements, for $52.3 million. The lease, which is being accounted for as an
operating lease, provides for an initial lease term of 21 years and may be
extended for one initial ten-year period and two additional successive periods
of five years each. The resulting gain of $4.5 million has been deferred and is
being amortized over the initial lease term. Net rent expense during the initial
term will be approximately $5.5 million annually and is included in the table of
future minimum annual rental commitments under non-cancelable operating leases.
Proceeds from the transaction were used to reduce outstanding borrowings under
our Revolving Credit Facility.
Capital expenditures were $82.0 million in 2000, $86.0 million in 1999 and
$57.7 million in 1998. These expenditures were primarily related to the opening
of new stores, as well as the relocation or remodeling of existing stores. We
opened 101, 80 and 50 net stores in 2000, 1999 and 1998, respectively. We
remodeled or relocated 8 stores in both 2000 and in 1999, and 18 stores in 1998.
Two new distribution centers were acquired; one in October 2000, located in
Little Rock, Arkansas, and the other in December 1999, located in Dallas, Texas.
On December 15, 2000, we entered into a $50 million Synthetic Operating
Lease Facility ("Synthetic Facility" or "the Facility") with a group of
financial institutions. Under the Facility, the Lessor acquires land to be
developed for O'Reilly Auto Parts stores and funds our development thereof as
the Construction Agent and Guarantor. We subsequently lease the property from
the lessor for an initial term of five years with two additional successive
renewal periods of five years each. The Facility provides for a residual value
guarantee and purchase options on the properties. It also contains a provision
for an event of default whereby the Lessor, among other things, may require us
to purchase any or all of the properties. We plan to utilize the Facility to
finance a portion of our planned store growth for 2001. Funding under the
Facility at December 31, 2000, totaled $1.0 million.
25
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
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 under our existing
credit facilities and the Synthetic facility.
On November 4, 1999, the 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 November 15, 1999. The stock dividend was paid on November 30,
1999.
In March 1999, we sold 7,002,000 shares 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 $175 million. The facility was reduced to $165 million in 1999
and further reduced to $152.5 million in 2000. The facility is comprised of a
$125 million revolving loan, a $5 million sublimit for the issuance of letters
of credit and a $27.5 million term loan. This credit facility is guaranteed by
our subsidiaries. At December 31, 2000, the effective interest rate on the
revolving and term loan portions, which each mature on January 27, 2003, was
7.0% per annum. At December 31, 2000, $50.2 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 2000 and 1999. The unaudited quarterly information includes all
adjustments which management considers necessary for a fair presentation of the
information shown.
26
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
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 2000
------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Product sales...................................... $ 195,758 $ 226,359 $ 251,413 $ 216,891
Gross profit....................................... 84,712 97,261 105,863 94,865
Operating income................................... 19,486 24,793 28,805 16,945
Net income......................................... 11,567 14,359 16,572 9,210
Basic net income per common share.................. 0.23 0.28 0.32 0.18
Net income per common share-assuming dilution...... 0.23 0.28 0.32 0.18
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
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 the results of our operations.
27
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Consolidated Balance Sheets
December 31,
2000 1999
-------------------------------
(In thousands)
Assets
Current assets:
Cash $ 9,204 $ 9,791
Short-term investments 500 500
Accounts receivable, less
allowance for doubtful accounts
of $135 in 2000 and $681 in 1999 32,673 26,462
Amounts receivable from vendors 29,175 25,984
Inventory 372,069 293,924
Refundable income taxes 92 2,333
Deferred income taxes 1,402 1,776
Other current assets 4,089 3,583
--------------------------
Total current assets 449,204 364,353
Property and equipment, at cost:
Land 46,740 54,631
Buildings 109,835 112,270
Leasehold improvements 34,750 25,841
Furniture, fixtures and equipment 106,068 80,569
Vehicles 25,628 19,495
--------------------------
323,021 292,806
Accumulated depreciation and amortization 76,167 56,289
--------------------------
Net property and equipment 246,854 236,517
--------------------------
Notes receivable 2,836 3,501
Other assets 17,101 6,071
--------------------------
Total assets $ 715,995 $ 610,442
==========================
28
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Consolidated Balance Sheets (continued)
December 31,
2000 1999
-------------------------------
(In thousands)
Liabilities and shareholders' equity
Current liabilities:
Notes payable to bank $ 35,000 $ 5,000
Income taxes payable 1,011 -
Accounts payable 68,947 64,885
Accrued payroll 9,309 6,278
Accrued benefits and withholdings 9,360 10,382
Other current liabilities 15,184 14,099
Current portion of long-term debt 14,121 14,358
--------------------------
Total current liabilities 152,932 115,002
Long-term debt, less current portion 90,463 90,704
Deferred income taxes 4,086 1,215
Other liabilities 4,783 477
Shareholders' equity:
Preferred stock, $0.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares -- none - -
Common stock, $0.01 par value:
Authorized shares--90,000,000
Issued and outstanding shares --
51,544,879 in 2000 and
50,799,353 in 1999 515 508
Additional paid-in capital 230,600 221,628
Retained earnings 232,616 180,908
--------------------------
Total shareholders' equity 463,731 403,044
--------------------------
Total liabilities and shareholders' equity $ 715,995 $ 610,442
==========================
See accompanying notes.
29
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Consolidated Statements Of Income
Years ended December 31,
2000 1999 1998
-------------------------------------
(In thousands, except per share data)
Product sales $ 890,421 $ 754,122 $ 616,302
Cost of goods sold, including warehouse
and distribution expenses 507,720 428,832 358,439
Operating, selling, general and
administrative expenses 292,672 248,370 200,962
----------------------------------
800,392 677,202 559,401
----------------------------------
Operating income 90,029 76,920 56,901
Other income (expense):
Interest expense (8,362) (5,343) (8,126)
Interest income 439 402 396
Other, net 1,053 1,045 772
----------------------------------
(6,870) (3,896) (6,958)
----------------------------------
Income before income taxes 83,159 73,024 49,943
Provision for income taxes 31,451 27,385 19,171
----------------------------------
Net income $ 51,708 $ 45,639 $ 30,772
==================================
Basic income per common share:
Net income per common share $ 1.01 $ 0.94 $ 0.72
==================================
Weighted average common
shares outstanding 51,168 48,674 42,476
==================================
Income per common share --
assuming dilution:
Net income per common share --
assuming dilution $ 1.00 $ 0.92 $ 0.71
----------------------------------
Adjusted weighted average
common shares outstanding 51,728 49,715 43,204
==================================
See accompanying notes.
30
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 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, 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 stock 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
Issuance of common stock under
employee benefit plans 364 3 4,535 - 4,538
Issuance of common stock under
stock option plans 381 4 3,460 - 3,464
Tax benefit of stock options exercised - - 977 - 977
Net income - - - 51,708 51,708
----------------------------------------------------------------
Balance at December 31, 2000 51,545 $ 515 $ 230,600 $ 232,616 $ 463,731
================================================================
See accompanying notes.
31
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Consolidated Statements Of Cash Flows
Years ended December 31,
2000 1999 1998
-------------------------------------
(In thousands, except per share data)
Operating activities
Net income $ 51,708 $ 45,639 $ 30,772
Adjustments to reconcile net income
to net cash provided by (used in)
Operating activities:
Depreciation and amortization 24,812 17,902 12,164
Provision for doubtful accounts 1,235 961 250
Loss (Gain) on sale of property
and equipment 220 (82) (134)
Deferred income taxes 3,245 5,455 7,629
Common stock contributed to
employee benefit plans 2,648 2,339 1,629
Tax benefit of stock options exercised 977 4,085 839
Post-retirement benefits - 12 12
Changes in operating assets and liabilities,
net of the effects of the acquisition:
Accounts receivable (7,446) 157 (5,809)
Amounts receivable from vendors (3,191) (1,644) (21,691)
Inventory (78,145) (47,912) (53,328)
Refundable income taxes 2,241 693 (5,527)
Other current assets (444) 734 (179)
Other assets - (1,931) (1,753)
Accounts payable 4,062 (1,852) 20,071
Income taxes payable 1,011 - -
Accrued payroll 3,031 1,479 (3,533)
Accrued benefits and withholdings (1,022) 2,038 2,156
Other current liabilities 870 3,386 (2,681)
Other liabilities 20 (1,744) -
----------------------------------
Net cash provided by (used in)
operating activities 5,832 29,715 (19,113)
----------------------------------
Investing activities
Purchases of property and equipment (81,987) (86,002) (57,732)
Acquisition, net of cash acquired - - (49,296)
Proceeds from sale of property and equipment 52,861 7,039 6,038
Proceeds from sale of short-term investments - - 500
Payments received on notes receivable 604 1,265 372
Advances made on notes receivable - (70) (650)
Investment in other assets (11,995) - -
----------------------------------
Net cash used in investing
activities (40,517) (77,768) (100,768)
----------------------------------
Financing activities
Borrowings on notes payable to bank 30,000 7,130 5,000
Payments on notes payable to bank - (7,130) -
Proceeds from issuance of long-term debt 431,159 172,892 157,860
Principal payments on long-term debt (432,415) (249,363) (46,651)
Net proceeds from secondary offering - 124,570 -
Net proceeds from issuance of common stock 5,354 8,017 3,115
----------------------------------
Net cash provided by financing activities 34,098 56,116 119,324
----------------------------------
Net increase (decrease) in cash (587) 8,063 (557)
Cash at beginning of year 9,791 1,728 2,285
----------------------------------
Cash at end of year $ 9,204 $ 9,791 $ 1,728
==================================
See accompanying notes.
32
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
O'Reilly Automotive, Inc. ("the Company") is a specialty retailer and
supplier of automotive aftermarket parts, tools, supplies and accessories to
both the "DIY" customer and the professional installer throughout Arkansas,
Illinois, Iowa, Kansas, Louisiana, Missouri, Nebraska, Oklahoma and Texas.
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 accounting principles generally accepted in the United States ("GAAP"),
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Inventory
Inventory, which consists of automotive hard parts, maintenance items,
accessories and tools, is stated at the lower of cost or market. Cost has been
determined using the last-in, first-out ("LIFO") method. If the first-in,
first-out ("FIFO") method of costing inventory had been used by the Company,
inventory would have been $369,869,000 and $291,077,000 as of December 31, 2000,
and 1999, respectively.
Amounts Receivable from Vendors
Amounts receivable from vendors consist 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
forty 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, 2000, 1999 and
1998, were $1,354,000, $1,134,000 and $1,213,000, 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.
33
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
charged to operations amounted to $12,150,000, $9,428,000 and $8,326,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Financial Instrument
The Company utilizes interest rate swap agreements to manage interest rate
risk on its floating rate debt. During 1998, the Company entered into an
interest-rate swap agreement to modify the interest characteristics of its
outstanding long-term debt from a floating rate to a fixed rate basis. This
agreement involves the receipt of floating rate amounts in exchange for fixed
rate interest payments over the life of the agreement without an exchange of the
underlying principal amount. The differential to be paid or received is accrued
as interest rates change and recognized as an adjustment to interest expense
related to the debt. The related amount payable to or receivable from the
counterparty is included in other liabilities or assets. The fair value of the
swap agreement is not recognized in the consolidated financial statements and
approximates its carrying cost.
Pre-opening Costs
Costs associated with the opening of new stores, which consist primarily
of payroll and occupancy costs, are charged to operations as incurred.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for its employee stock options because, as
discussed in Note 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 $2,066,000 and
$2,137,000 at December 31, 2000 and 1999, respectively, bears interest at 6% and
is due in August 2017.
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.
Reclassifications
The reclassifications of certain amounts have been made to the 1999 and 1998
consolidated financial statements to conform to the 2000 presentation.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as deferred by
SFAS No. 137, 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.
34
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
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 January 1, 1998, after giving effect to certain adjustments,
including the application of the excess of net assets acquired over the purchase
price to the acquired property and equipment and resulting effect on
depreciation, increased interest expense on long-term debt related to the
acquisition, and the related income tax effects.
1998
------------
(In thousands,
except per
share data)
Product sales $ 634,072
Net income $ 29,443
Net income per share - assuming dilution $ 0.68
The pro forma combined results are not necessarily indicative of the
results that would have occurred if the acquisition had been completed as of
January 1, 1998.
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, 2000, and 1999, 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 $2,671,000, $2,647,000 and $2,158,000 in 2000,
1999 and 1998, respectively.
NOTE 5--NOTE PAYABLE TO BANK
At December 31, 2000, the Company had available short-term unsecured bank
lines of credit providing for maximum borrowings of $10 million, all of which
was outstanding at December 31, 2000, and $5 million of which was outstanding at
December 31, 1999. The lines of credit bear interest at LIBOR plus 0.50% (7.25%
at December 31, 2000). Additionally, at December 31, 2000, the Company had
available a short-term line of credit in the amount of $25 million, all of which
was outstanding at December 31, 2000. This line of credit was paid in full on
January 9, 2001. The line of credit bears interest at LIBOR plus 0.75% (7.45% at
December 31, 2000). The weighted-average interest rate for all lines of credit
for the years ended December 31, 2000, and 1999 was 7.2% and 6.7%, respectively.
35
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 6--LONG-TERM DEBT
At December 31, 2000, the Company had available an unsecured credit
facility providing for maximum borrowings of $152.5 million. The facility is
comprised of a revolving credit facility of $125 million, and a term loan of
$27.5 million. At December 31, 1999, the Company had available a credit facility
providing for maximum borrowings of $165 million. The facility was comprised of
a $125 million revolving credit facility and a $40 million term loan. At
December 31, 2000, and 1999, $74,755,000 and $61,560,000, respectively, of the
revolving credit facility and $27.5 million and $40 million, respectively, of
the term loan were outstanding. The credit facility, which bears interest at
LIBOR plus 0.50% (7.0% at December 31, 2000), expires in January 2003.
During 2000 and 1999, the Company leased certain computer equipment under
capitalized leases. The lease agreements are three-year terms expiring from 2001
to 2003. At December 31, 2000, the monthly installments under these agreements
were approximately $180,000. The present value of the future minimum lease
payments under these agreements totaled $2,232,000 and $3,362,000 at December
31, 2000, and 1999, respectively, which has been classified as long-term debt in
the accompanying consolidated financial statements. During 2000 and 1999, the
Company purchased $800,000 and $2,676,000, respectively, of assets under
capitalized leases.
Additionally, the Company has various unsecured notes payable to
individuals, amounting to $97,000 and $140,000, at December 31, 2000, and 1999,
respectively. The notes bear interest at rates ranging from 7.75% to 9.0% and
are due in monthly installments of approximately $1,500 including interest. Only
one note remained at December 31, 2000, which matures in 2008.
Indirect borrowings under letters of credit provided by a $5,000,000
sublimit of the revolving credit facility totaled $648,510 and $1,275,000 at
December 31, 2000, and 1999, respectively. These letters of credit reduced
availability of borrowings at December 31, 2000, and 1999.
Principal maturities of long-term debt for each of the next five years
ending December 31 are as follows (amounts in thousands):
2001 $ 14,121
2002 11,715
2003 78,684
2004 13
2005 14
Thereafter 37
---------
$ 104,584
Cash paid by the Company for interest during the years ended December 31,
2000, 1999 and 1998 amounted to $8,240,000, $6,134,000, and $8,509,000,
respectively.
36
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
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.
On December 29, 2000, the Company completed a sale-leaseback
transaction. Under the terms of the transaction, the Company sold 90 properties,
including land, buildings and improvements, for $52.3 million. The lease, which
is being accounted for as an operating lease, provides for an initial lease term
of 21 years and may be extended for one initial ten-year period and two
additional successive periods of five years each. The resulting gain of $4.5
million has been deferred and is being amortized over the initial lease term.
Net rent expense during the initial term will be approximately $5.5 million
annually and is included in the table of future minimum annual rental
commitments under non-cancelable operating leases. Proceeds from the transaction
were used to reduce outstanding borrowings under the Company's Revolving Credit
Facility.
On December 15, 2000, the Company entered into a $50 million Synthetic
Operating Lease Facility ("the Facility") with a group of financial
institutions. Under the Facility, the Lessor acquires land to be developed for
O'Reilly Auto Parts stores and funds the development thereof by the Company as
the Construction Agent and Guarantor. The Company subsequently leases the
property from the Lessor for an initial term of five years with two additional
successive renewal periods of five years each. The Facility provides for a
residual value guarantee and purchase options on the properties. It also
contains a provision for an event of default whereby the Lessor, among other
things, may require the Company to
purchase any or all of the properties. The Company plans to utilize the Facility
to finance a portion of its planned store growth for 2001. Funding under the
Facility at December 31, 2000, totaled $1.0 million.
The Company also leases certain office space, retail stores, property and
equipment under long-term, non-cancelable operating leases. Most of these leases
include renewal options and some include options to purchase and provisions for
percentage rent based on sales. At December 31, 2000, future minimum rental
payments under all of the Company's operating leases for each of the next five
years and in the aggregate are as follows (amounts in thousands):
Related Non-related
Parties Parties Total
2001 $ 2,032 $ 19,823 $ 21,855
2002 1,957 18,239 20,196
2003 1,160 16,874 18,034
2004 1,001 15,436 16,437
2005 665 13,273 13,938
Thereafter 5,575 112,305 117,880
--------- --------- ---------
$ 12,390 $ 195,950 $ 208,340
========= ========= =========
Rental expense amounted to $16,219,000, $14,122,000 and $13,862,000 for
the years ended December 31, 2000, 1999, and 1998, respectively.
Other Commitments
The Company had construction commitments, which totaled approximately $7.0
million, at December 31, 2000.
37
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
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. On June 6, 2000, the Supreme Court of Texas denied the appeal for a
mandamus. On January 15, 2001, the Company reached a favorable verbal settlement
with the plaintiffs' counsel. The settlement documents are currently being
prepared and will be subject to the approval of the Trial Court.
The Company believes that this lawsuit will not have a material adverse effect
on the Company's consolidated financial position, results of operations or cash
flows.
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, $50 million and $100 million, respectively, at January 27, 2000,
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 January
27, 2000, and December 31, 1999. The swap agreement expired on January 27, 2000.
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. Company contributions charged
38
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 10--EMPLOYEE BENEFIT PLANS (continued)
to operations amounted to $2,454,000 in 2000, $2,618,000 in 1999 and $1,818,000
in 1998. Company contributions, in the form of common stock, to the profit
sharing and savings plan to match employee contributions during the years ended
December 31 were as follows:
Year Market
Contributed Shares Value
---------------------------------------------
2000 49,891 $ 724,000
1999 29,481 658,000
1998 31,438 514,000
Profit sharing contributions accrued at December 31, 2000, 1999, and 1998
funded in the next year through the issuance of shares of the Company's common
stock were as follows:
Year Market
Funded Shares Value
--------------------------------------------
2000 132,890 $ 1,919,000
1999 60,640 1,300,000
1998 72,386 1,070,000
The Company also sponsors an unfunded non-contributory 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. Post-retirement benefit costs for each of the years ended December 31,
2000, 1999, and 1998 amounted to $12,000.
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, 147,315 shares were issued
at a weighted- average price of $12.83 per share during 2000, 78,927 shares were
issued at a weighted-average price of $18.90 per share during 1999, and 74,632
shares were issued at a weighted-average price of $15.05 per share during 1998.
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, 12,164 shares, 6,796 shares and 5,358
shares were issued during 2000, 1999, and 1998, respectively.
NOTE 11--STOCK OPTION PLANS
The Company has a stock option plan under which incentive stock options or
non-qualified stock options may be granted to officers and key employees. An
aggregate of 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
39
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 11--STOCK OPTION PLANS (continued)
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, 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 5.94 - 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
Granted 10.56 - 24.38 581,250
Exercised 6.07 - 22.75 (361,875)
Canceled 10.00 - 25.88 (206,625)
----------
Outstanding at December 31, 2000. $ 8.00 - 26.75 3,359,230
==========
Options to purchase 1,729,033, 1,171,888, and 855,100 shares of common
stock were exercisable at December 31, 2000, 1999, and 1998, 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, 1997 $ 4.38 - 9.10 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
Granted 12.44 20,000
Exercised 6.56 - 6.75 (20,000)
Canceled - -
----------
Outstanding at December 31, 2000 $ 9.09 - 23.91 90,000
==========
All options under this plan were exercisable at December 31, 2000, 1999,
and 1998.
40
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 11--STOCK OPTION PLANS (CONTINUED)
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 2000, 1999, and 1998, respectively; risk-free interest rates of
5.02%, 6.54% and 4.74%; volatility factors of the expected market price of the
Company's common stock of .442, .247, and 221; and weighted-average expected
life of the options of 8.9, 8.0 and 8.0 years. The Company assumed a 0% dividend
yield over the expected life of the options. The weighted-average fair values of
options granted during the years ended December 31, 2000, 1999, and 1998 were
$9.24, $10.22 and $6.44, respectively. The weighted-average remaining
contractual life at December 31, 2000, for all outstanding options under the
Company's stock option plans is 7.1 years. The weighted-average exercise price
for all outstanding options under the Company's stock option plans was $16.12 at
December 31, 2000.
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:
2000 1999 1998
--------------------------------------
(In thousands, except per share data)
Pro forma net income $ 48,177 $ 43,501 $ 29,242
======================================
Pro forma basic net
income per share $ 0.94 $ 0.89 $ 0.69
======================================
Pro forma net income per
share - assuming dilution $ 0.93 $ 0.88 $ 0.67
======================================
41
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
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,
2000 1999 1998
--------------------------------------
(In thousands, except per share data)
Numerator (basic and diluted):
Net income $ 51,708 $ 45,639 $ 30,772
======================================
Denominator:
Denominator for basic income
per common share -
weighted-average shares 51,168 48,674 42,476
Effect of stock options (Note 11). 560 1,041 728
---------------------------------------
Denominator for diluted income
per common share - Adjusted
weighted-average shares and
assumed conversion 51,728 49,715 43,204
=======================================
Basic net income per common share $ 1.01 $ 0.94 $ 0.72
=======================================
Net income per common share -
assuming dilution $ 1.00 $ 0.92 $ 0.71
=======================================
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:
2000 1999
--------------------------
(In thousands)
Deferred tax assets:
Current:
Allowance for doubtful accounts............... $ 51 $ 226
Other accruals................................. 2,960 3,586
--------------------------
3,011 3,812
Noncurrent:
Other...............................................834 1,306
--------------------------
Total deferred tax assets.................3,845 5,118
Deferred tax liabilities:
Current:
Inventory carrying value....................... 1,609 2,036
Noncurrent:
Property and equipment................... 4,920 2,521
Total deferred tax liabilities 6,529 4,557
--------------------------
Net deferred tax assets (liabilities) $ (2,684) $ 561
==========================
42
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 13--INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
Current Deferred Total
----------------------------------------------
(In thousands)
2000:
Federal $ 25,120 $ 2,946 $ 28,066
State 3,086 299 3,385
----------------------------------------------
$ 28,206 $ 3,245 $ 31,451
==============================================
1999:
Federal $ 19,934 $ 4,959 $ 24,893
State 1,996 496 2,492
----------------------------------------------
$ 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
==============================================
A reconciliation of the provision for income taxes to the amounts computed
at the federal statutory rate is as follows:
2000 1999 1998
------------------------------------
(In thousands)
Federal income taxes at statutory rate $ 29,106 $ 25,558 $ 17,480
State income taxes, net of federal tax
benefit 2,200 1,625 1,256
Other items, net 145 202 435
------------------------------------
$ 31,451 $ 27,385 $ 19,171
====================================
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, 2000, 1999, and 1998, cash paid by the
Company for income taxes amounted to $24,244,000, $17,151,000 and $16,229,000,
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.
43
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 15--PUBLIC OFFERING OF COMMON STOCK
In March 1999, the Company completed a secondary public offering of
7,002,000 shares of common stock. Pursuant to this offering, the Company issued
7,002,000 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, 2000
Product sales $ 195,758 $ 226,359 $ 251,413 $ 216,891
Gross profit 84,712 97,261 105,863 94,865
Operating income 19,486 24,793 28,805 16,945
Net income 11,567 14,359 16,572 9,210
Basic net income per share 0.23 0.28 0.32 0.18
Net income per share-assuming dilution 0.23 0.28 0.32 0.18
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
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.
44
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 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, 2000, and 1999, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000. 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, 2000, and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
February 23, 2001
45
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 2000 Annual Report to Shareholders (continued)
Shareholder Information
CORPORATE ADDRESS
233 South Patterson
Springfield, Missouri 65802
417/862-3333
Web site - www.oreillyauto.com
REGISTRAR AND TRANSFER AGENT
UMB Bank
928 Grand Boulevard
Kansas City, Missouri 64141-0064
Inquiries regarding stock transfers, lost certificates or address changes should
be directed to UMB Bank at the above address.
INDEPENDENT AUDITORS
Ernst and Young LLP
One Kansas City Place
Kansas City, Missouri 64105-2143
LEGAL COUNSEL
Gallop Johnson & Neuman, L.C.
101 South Hanley Road, Suite 1600
St. Louis, Missouri 63105
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive, Suite 2100
Chicago, Illinois 60606
ANNUAL MEETING
The annual meeting of shareholders of O'Reilly Automotive, Inc. will be held at
10:00 a.m. local time on May 8, 2001, at the University Plaza Convention Center,
333 John Q. Hammons Parkway in Springfield, Missouri. Sharedholders of record as
of February 28, 2001, will be entitled to vote at this meeting.
FORM 10-K REPORT
The Form 10-K Report of O'Reilly Automotive, Inc. filed with the Securities and
Exchange Commission and our quarterly press releases are available without
charge to shareholders upon written request. These requests and other investor
contacts should be directed to James R. Batten, Vice President of Finance/Chief
Financial Officer, at the corporate address.
TRADING SYMBOL
The Company's common stock is traded on The Nasdaq Stock Market (National
Market) under the symbol ORLY.
NUMBER OF SHAREHOLDERS
As of February 28, 2001, O'Reilly Automotive, Inc. had approximately 19,500
shareholders based on the number of holders of record and an estimate of the
number of individual participants represented by security position listings.
ANALYST COVERAGE
The following analysts provide research coverage of O'Reilly Automotive, Inc.
Credit Suisse First Boston - Gary Balter
William Blair & Co. - Ellen Baras
A.G. Edwards - Mark Johnson
Merrill Lynch - Douglas Neviera
Advest - Brett Jordan
Smith Moore & Co. - John Rast
MARKET PRICES AND DIVIDEND INFORMATION
The prices in the table below represent the high and low sales price for
O'Reilly Automotive, Inc. common stock as reported by the Nasdaq Stock Market.
The common stock began trading on April 22, 1993. No cash dividends have been
declared since 1992, and the Company does not anticipate paying any cash
dividends in the forseeable future.
2000 1999
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
First Quarter $ 22-1/8 $ 8-1/4 $ 26-3/8 $ 12-5/8
Second Quarter 15-7/16 11-3/4 25-3/4 20
Third Quarter 16-1/8 13-1/8 27-5/16 17-7/8
Fourth Quarter 27-1/4 14 24-3/8 19-7/16
For the Year 27-1/4 8-1/4 27-5/16 17-7/8
46
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.
47
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 23,
2001, included in the 2000 Annual Report to Shareholders of O'Reilly Automotive,
Inc.
Our audits also included the consolidated 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-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 23, 2001, 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, 2000.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
March 27, 2001
48