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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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file number 0-21318
O'REILLY AUTOMOTIVE, INC.
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(Exact name of registrant as specified in its charter)
Missouri 44-0618012
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or
organization)
233 South Patterson
Springfield, Missouri 65801
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(Address of principal executive offices, zip code)
(417) 862-6708
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing for the past 90 days Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained here, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
At February 26, 1999, an aggregate of 21,376,421 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 $939,226,498 based on the last sale price of the common stock
reported by the Nasdaq Stock Market (National Market).
DOCUMENTS INCORPORATED BY REFERENCE
As provided here, 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, 1998 Parts I, II and IV
Proxy Statement for 1999 Annual Meeting of
Shareholders (to be filed pursuant to
Regulation 14A within 120 days of the end of Part III
registrant's most recently completed fiscal
year)
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 evens 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, 1998 we operated 491
stores in Texas, Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana,
Nebraska and Illinois. Our stores carry an extensive product line
consisting of:
o new and remanufactured automotive hard parts, such as alternators,
starters, fuel pumps, water pumps, brake shoes and pads, chassis
parts and engine parts;
o maintenance items, such as oil, antifreeze, fluids, engine additives and
appearance products;
o accessories, such as floor mats and seat covers; and
o a complete line of autobody paint and related materials, automotive
tools and professional service equipment.
We do not sell tires or perform automotive repairs or installations.
We were founded in 1957 by Charles F. O'Reilly and his son, Charles H.
"Chub" O'Reilly, Sr. (one of our current directors), and initially operated
from a single store in Springfield, Missouri. The O'Reilly family has managed
the company since our inception.
Our goal is to continue to achieve growth in sales and profitability
by capitalizing on our competitive advantages and executing our growth and
expansion strategies.
See "Risk Factors" beginning on page 11 for a description of certain
risks relevant to an investment in our common stock. These risk factors
include, among others, risks related to competition in the automotive
aftermarket business, our growth strategy, our acquisition strategy, our
sensitivity to regional economic and weather conditions, our dependence
upon key and other personnel, the significant voting control held by our
principal shareholders and the Year 2000 issue.
Competitive Advantages
Proven Ability to Execute Dual Market Strategy. We have an established
track record of serving both DIY customers and professional installers. We
believe our ability to execute a dual market strategy is a competitive
advantage which enables us to:
o target a larger base of consumers of automotive aftermarket parts;
o capitalize on our existing retail and distribution infrastructure;
o profitably operate both in large markets and less densely populated
geographic areas which typically attract fewer competitors; and
o enhance service levels offered to our DIY customers by offering a
broad selection of stock keeping units ("SKUs") and extensive product
knowledge required by professional installers.
We have been committed to a dual market strategy for over 20 years and
from the mid-1980's through 1997 derived approximately 50% of our product
sales from our DIY customers and approximately 50% from our professional
installer customers. As a result of our acquisition of Hi/LO, which derived
approximately 65% of its sales from DIY customers and approximately 35%
from professional installers prior to the acquisition, for 1998 we derived
approximately 57% of our product sales from our DIY customers and
approximately 43% from our professional installer customers. As a result of
our historical success in executing our dual market strategy and our over
70 full-time sales representatives dedicated solely to calling upon and
selling to the professional installer, we believe we will increase the
former Hi/LO stores' sales to professional installers and have a
competitive advantage over our retail competitors who have only recently
entered and begun focusing on the professional installer market.
Superior Customer Service. We seek to attract new DIY and professional
installer customers and to retain existing customers by offering superior
customer service, the key elements of which include:
o superior in-store service through highly-motivated, technically
proficient store personnel ("Professional Parts People") using
advanced point-of-sale systems;
o an extensive selection of products;
o attractive stores in convenient locations; and
o competitive pricing, with a low price guarantee.
Technically Proficient Professional Parts People. Our highly
proficient Professional Parts People provide us with a significant
competitive advantage, particularly over less specialized retail operators.
We require our Professional Parts People to undergo extensive and ongoing
training and to be technically knowledgeable, particularly with respect to
hard parts, in order to better serve the technically-oriented professional
installers with whom they interact on a daily basis. Such technical
proficiency also enhances the customer service we provide to our DIY
customers, who appreciate the expert assistance provided by our
Professional Parts People.
Strategic Distribution Systems. We believe that the geographic
concentration of our store network in nine contiguous states (Missouri,
Iowa, Nebraska, Kansas, Oklahoma, Texas, Louisiana, Arkansas and Illinois)
and the strategic locations of our four distribution centers enable us to
maintain optimum inventory levels throughout our store network. In
addition, our inventory management and distribution systems electronically
link each 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 20 consecutive quarters of year-to-year record sales and
earnings growth. We have a strong senior management team comprised of 37
professionals who average 20 years of experience with O'Reilly. In
addition, our 50 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
80 stores in 1999 (including a net of seven stores to be acquired from
Hinojosa Auto Parts in April 1999) and approximately 100 stores in 2000.
Nearly all of the sites for our proposed 1999 store openings and a majority
of the sites for our proposed 2000 store openings have been identified. In
selecting sites for new stores, we seek to strategically locate store sites
in clusters within geographic areas in order to achieve economies of scale
in areas such as management, advertising and distribution.
Until 1986, our expansion was targeted to markets with populations of
less than 100,000. We entered into a more densely populated market in
August 1986 with the opening of the first of its 29 stores which now serve
the greater Kansas City, Missouri, marketing area. Of the 50 (net) stores
opened in 1998 (other than the Hi/LO stores), 15 are located in Iowa, 15 in
Oklahoma, 10 in Texas, 4 in Missouri and the remainder are located in
Kansas, Nebraska, Illinois and Arkansas. 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.
In October 1998, we agreed to purchase substantially all of the assets
of Hinojosa Auto Parts for approximately $6 million. Hinojosa is a
specialty retailer and supplier of automotive aftermarket products with a
chain of 10 stores and a 48,000 square foot distribution center operating
in the Rio Grande Valley along the Texas/Mexico border. We expect the
acquisition of Hinojosa to close in April 1999.
Effective January 31, 1998, we acquired Hi/LO, a specialty retailer
and supplier of automotive aftermarket products headquartered in Houston,
Texas. Following the acquisition, we sold seven Hi/LO stores located in
California. Of the 182 stores remaining after such sale, 165 are located in
Texas and 17 are located in Louisiana. Through the Hi/LO acquisition, we
also acquired a 425,000 square foot distribution center located in Houston.
The Hi/LO operations are contiguous to our other operations, thereby
creating a natural geographic extension of our business. In addition, Hi/LO
was experienced in serving professional installers, deriving approximately
35% of its revenues from such customers. We acquired Hi/LO for a cash
purchase price of approximately $49.3 million. At the time of the
acquisition, Hi/LO had $43.2 million of existing debt, which we assumed.
We expect to continue realizing the benefits of the nearly completed
integration of the 182 net stores we acquired through the acquisition of
Hi/LO. We have updated the products offered at the Hi/LO stores with a
product mix consistent with our existing stores, converted the Hi/LO stores
to our MIS systems and, in some cases, renovated or relocated Hi/LO stores.
Furthermore, we intend to continue to pursue business in the professional
installer market in Hi/LO's service areas, and benefit from increased
leverage in purchasing and reduced overhead expenses.
Continually Enhance Store Design and Location. Our current prototype
store design features enhancements such as greater square footage, higher
ceilings, more convenient interior store layouts, brighter lighting,
increased parking availability and dedicated counters to serve professional
installers, each designed to increase product sales and operating
efficiencies and enhance customer service. We continually update the
location and condition of our store network through systematic renovation
and relocation of our existing stores to conform with our prototype store
design. In 1998, we renovated or relocated 18 stores, and in 1999 plan to
renovate or relocate approximately 19 stores. We believe that our ability
to consistently achieve significant 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, 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 30% of our total
purchases in 1998, after giving effect to the consolidation of several of
our vendors which occurred towards the end of the year. After such
consolidation, our largest vendor in 1998 accounted for approximately 13%
of our total purchases and no other vendor accounted for more than 5% of
such purchases. We have no long-term contractual purchase commitments with
any of our vendors, nor have we experienced difficulty in obtaining
satisfactory alternative sources of supply for automotive parts. We believe
that alternative supply sources exist at substantially similar costs, for
substantially all automotive products that we sell. It is our policy to
take advantage of early payment and seasonal purchasing discounts offered
by our vendors, and to utilize extended dating terms available from vendors
due to volume purchasing. We consider our relationships with our suppliers
to be good.
Store Network
Store Locations. As a result of our dual market strategy, we are able
to profitably operate in both large, densely populated markets and less
densely populated areas which would not otherwise support a national or
regional chain selling to just one portion of the automotive aftermarket.
The following table sets forth the geographic distribution of our stores:
Number
State of Stores
Texas 174
Missouri 113
Oklahoma 87
Kansas 47
Iowa 22
Arkansas 17
Louisiana 17
Nebraska 13
Illinois 1
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Total 491
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Our stores on average carry approximately 23,000 SKUs and average
approximately 6,500 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 49 Master Inventory
Stores, which on average carry approximately 40,000 SKUs and are
approximately 10,000 square feet in size. Master Inventory Stores, in
addition to serving DIY and professional installer customers in their
markets, also provide our other stores within their areas access to a
greater selection of SKUs on a same day basis.
We believe that our stores are "destination stores" generating their
own traffic rather than relying on traffic created by the presence of other
stores in the immediate vicinity. Consequently, most of our stores are
free-standing buildings situated on or near major traffic thoroughfares,
and offer ample parking and easy customer access.
Store Layout. We utilize a computer-assisted "plan-o-grammed" store
layout system to provide a uniform and consistent merchandise presentation;
however, some variation occurs in order to meet the specific needs of a
particular market area. Merchandise is arranged to provide easy customer
access and maximum selling space, keeping high-turnover products and
accessories within view of the customer. Aisle displays are generally used
to feature high-demand or seasonal merchandise, new items and advertised
specials.
Store Automation. To enhance store level operations and customer
service, we use IBM AS/400 computer systems in all of our stores. These
systems are linked with the IBM AS/400 computers located in each of our
distribution centers. Our point-of-sale terminals use bar code scanning
technology to price our merchandise and provide immediate access to our
electronic catalog to display parts and pricing information by make, model
and year of vehicle. This system speeds transaction times, reduces register
lines and provides enhanced customer service. Moreover, our store
automation systems capture sales information which assists in store
management, strategic planning, inventory control and distribution
efficiency.
New Store Site Selection. In selecting sites for new stores, we seek
to strategically locate store sites in clusters within geographic areas in
order to achieve economies of scale in management, advertising and
distribution. Other key factors we consider in the site selection process
include:
o population density and growth patterns;
o age and per capita income;
o vehicle traffic counts;
o the number and type of existing automotive repair facilities; and
o the number of auto parts stores and other competitors within a
pre-determined radius and the operational strength of such
competitors.
When entering new, more densely populated markets, we generally seek
to initially open several stores within a short span of time in order to
maximize the effect of initial promotional programs and achieve further
economies of scale. After opening this initial cluster of new stores, we
seek to begin penetrating the less densely populated surrounding areas.
This strategy enables us to achieve additional distribution and advertising
efficiencies in each market.
Distribution System
The following table sets forth the distribution centers we currently
operate:
Number of
Location Square Footage Stores Served
Houston, TX 424,823 183
Springfield, MO 254,720 118
Oklahoma City, OK 238,520 104
Kansas City, MO 128,064 86
In addition, adjacent to the Springfield, Missouri distribution
center, we operate a 36,000 square foot bulk merchandise warehouse used for
the distribution of bulk products such as motor oil, antifreeze, batteries,
lubricants and other fast moving bulk products, and an 18,000 square foot
facility where goods to be returned are stored.
Our distribution centers are equipped with highly automated conveyor
systems which expedite the movement of our products to loading areas for
shipment to individual stores on a nightly basis. The distribution centers
utilize computer-assisted technology to electronically receive orders from
computers located in each of our stores. In addition to the bar code system
employed in our stores, we have established a satellite-based data
interchange system among those stores in which high-speed data transmission
technology is not readily available, the distribution center which services
such stores and our corporate headquarters.
We believe that 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 1999 we plan to:
o open a distribution center in Des Moines, Iowa;
o acquire a distribution center in McAllen, Texas as a result of the
planned Hinojosa acquisition;
o increase the service radius of the distribution center in Oklahoma City,
Oklahoma which we recently expanded; and
o implement a new warehouse management system in certain distribution
centers which will enhance the efficiency of our distribution
network.
Marketing
Marketing to the DIY Customer. We aggressively promote sales to DIY
customers through an extensive advertising program which includes direct
mail and newspaper, radio and television advertising in selected markets.
We believe that our advertising and promotional activities have resulted in
significant name recognition in each of our market areas. Newspaper and
radio advertisements are generally directed towards specific product and
price promotions, frequently in connection with specific sale events and
promotions. To promote sales to car enthusiasts, who we believe on an
individual basis spend more on automotive products than the public
generally, we sponsor over 35 motorsports shows at over 50 racetracks in
nine states, including the O'Reilly Auto Parts Mid-West Outlaw Mini-Sprints
and the O'Reilly Oklahoma Legends Dirt racing series, as well as three
National Hotrod Racing Association races in Houston and Dallas. We have
found that the more progressive marketing concepts utilized in the DIY
portion of our business can also be applied to increase sales to our
professional installer customers.
Marketing to the Professional Installer. We have over 70 full-time
O'Reilly sales representatives strategically located in the more densely
populated market areas that we serve, and each is dedicated solely to
calling upon and selling to the professional installer. Moreover, each
district manager and store manager throughout our store network calls upon
existing and potential new professional installer customers on a regular
basis. Our marketing strategy with respect to professional installers
emphasizes our ability to offer:
o prompt delivery using small trucks or vans operated by most of our
stores;
o a separate counter in most of our stores dedicated exclusively to
serving professional installers;
o trade credit for qualified professional installers;
o broad inventory of merchandise and competitive pricing;
o a professional installer computer system that connects directly to our
inventory system; and
o seminars concerning topics of interest to professional installers,
such as technical updates, safety and general business management.
Marketing to the Independently Owned Parts Store. Along with the
operation of the distribution centers and the distribution of Automotive
Products to the O'Reilly stores, Ozark also sells Automotive Products to
independently owned parts stores whose retail stores are generally located
in areas not serviced by an O'Reilly store. We generally do not compete
with any independently owned parts store to which we sell Automotive
Products, but have, on occasion, acquired the business assets of an
independently owned parts store supplied by Ozark. Ozark operates its own
separate marketing program to independently owned parts stores through a
staff of five. Of the approximately 60 independently owned parts stores
currently purchasing Automotive Products from Ozark, 56 participate in the
Auto Value(R) program through Ozark. As a participant in this program, an
independently owned parts store which meets certain minimum financial and
operational standards is permitted to indicate its Auto Value(R) membership
through the display of the Auto Value(R) logo, which is owned by Auto Value
Associates, Inc. ("Auto Value Associates"), a non-profit buying group
consisting of 41 members as of December 31, 1998, 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 50 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 monthly
basis focusing on management techniques, new product announcements,
advanced automotive systems and our policies and procedures. In turn, the
information covered at such monthly meetings is discussed in full by
district managers at monthly meetings with their store managers. All
assistant managers and manager trainees are required to successfully
complete a six-month manager development program, which includes 85 hours
of classroom and field training, as a prerequisite to becoming a store
manager. This program covers operations extensively, as well as principles
of successful management.
We provide financial incentives to our district managers, store
managers, assistant managers and sales specialists through an incentive
compensation program. Under our incentive compensation program, base salary
is augmented by incentive compensation based upon the achievement of sales
and profitability goals. We believe that our incentive compensation program
significantly increases the motivation and overall performance of our
Professional Parts People and our ability to attract and retain qualified
management and other personnel.
Most of our current senior management, district managers and store
managers were promoted to their positions from within the Company. Our
senior management team averages 20 years of experience with the Company and
district managers have an average length of service with the Company of
over 10 years.
Professional Parts People
We believe our highly trained team of Professional Parts People is
essential in providing superior service both to DIY and professional
installer customers. Each of our Professional Parts People is required to
be technically proficient in the workings and application of automotive
products due to the significant portion of our business represented by the
professional installer. In addition, we have found that the typical DIY
customer often seeks assistance from sales persons, particularly in
connection with the purchase of hard parts. We believe that the ability of
our Professional Parts People to provide such assistance to the DIY
customer creates a favorable impression during a customer's visit to our
store and is a significant factor in generating repeat DIY business.
We screen prospective employees, whom we refer to as team members, to
identify highly motivated individuals either with experience in automotive
parts or repairs, or an aptitude for automotive knowledge. Each person who
becomes a team member first participates in an intensive two-day
orientation program designed to introduce the team member to our culture
and his or her job duties before being assigned specific job
responsibilities. The successful completion of additional training is
required before a team member is deemed qualified as a parts specialist and
thus able to work at the parts counter of one of our stores. All new
counter people are required to successfully complete a six-month basic
automotive systems training course and are then enrolled in a six-month
advanced automotive systems course for certification by the National
Institute for Automotive Service Excellence ("ASE"), which administers
national exams for various automotive specialties and requires ASE
certified specialists to take recertification exams every five years.
Each of our stores participates in our sales specialist training
program. Under this program, selected team members complete two days of
extensive sales call training for business development, after which these
team members will spend one day per week calling on existing and new
professional installer customers. Additionally, each team member engaged in
such sales activities will participate in quarterly advanced training
programs for sales and business development.
Customer Service
We seek to provide our customers with an efficient and pleasant
in-store experience by maintaining attractive stores in convenient
locations with a wide selection of automotive products. We believe that the
satisfaction of DIY and professional installer customers is substantially
dependent upon our ability to provide, in a timely fashion, the specific
automotive product requested. Accordingly, each O'Reilly store carries a
broad selection of automotive products designed to cover a wide range of
vehicle specifications. We continuously refine the inventory levels carried
in our stores, based in large part on the sales movement shown by our
computerized inventory control system and on management's assessment of the
changes and trends in the marketplace.
Pricing
We believe that a competitive pricing policy is essential within
product categories in order to compete successfully. Product pricing is
generally established to meet the pricing policies of competitors in the
market area served by each store. Most automotive products that we sell are
priced at discounts to the manufacturer suggested prices, and additional
savings are offered through volume discounts and special promotional
pricing. Consistent with our low price guarantee, each of our stores will
match any verifiable price on any in-stock product of the same or
comparable quality offered by any of our competitors.
Competition
We compete in both the DIY and professional installer portions of the
automotive aftermarket. We compete primarily with:
o national and regional retail automotive parts chains (such as
AutoZone, Inc., Advance Auto Parts and The Pep Boys-Manny, Moe and
Jack, Inc.);
o independently owned parts stores;
o wholesalers or jobber stores (some of which are associated with
national automotive parts distributors or associations such as NAPA
and CarQuest);
o automobile dealers; and
o mass merchandisers that carry automotive replacement parts,
maintenance items and accessories (such as Wal-Mart Stores, Inc.).
We compete on the basis of customer service, which includes
merchandise selection and availability, price, helpfulness of store
personnel and store layout and location.
Team Members
As of December 31, 1998, we had 6,330 full-time team members and 1,547
part-time team members, of whom 6,081 were employed at our stores, 1,244
were employed at our distribution centers and 552 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), Because It's Your Car We're Talking About(R) and Parts
Payoff(R) and the trademarks SuperStart(R), BrakeBest(R), Omnispark(R) and
First Call(R). Further, we are licensed to use the registered trademarks
and servicemarks Auto Value(R) and Parts Master(R) owned by Auto Value
Associates in connection with our marketing program. We believe that our
business is not otherwise dependent upon any patent, trademark, servicemark
or copyright.
Regulations
Although subject to various laws and governmental regulations relating
to our business, including those related to the environment, we do not
believe that compliance with such laws and regulations has a material
adverse effect on our operations. Further, we are unaware of any failure to
comply with any such laws and regulations which could have a material
adverse effect on our operations. No assurance can be given, however, that
significant expenses would not be incurred by us to comply with any such
law or regulation in the future.
Risk Factors
Some of the information in this Form 10-K contains and future reports
and press releases and other public information may contain forward-looking
statements that involve substantial risks and uncertainties. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," and "continue" or similar
words. These "forward-looking statements" are made in reliance upon the
safe harbor provisions of the Private Litigation Reform Act of 1995 (See
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934.) You should read statements that contain these words
carefully because they: (1) discuss our future expectations; (2) contain
projections of our future results of operations or of our financial
condition; or (3) state other "forward-looking" information. We believe it
is important to communicate our expectations to our investors. However,
there may be events in the future that we are not able to accurately
predict or over which we have no control. The risk factors listed in this
section, as well as any cautionary language in this Form 10-K, provide
examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the occurrence of the
events described in these risk factors and elsewhere in this Form 10-K
could have a material adverse effect on our business, operating results and
financial condition.
The Automotive Aftermarket Business is Highly Competitive
Both the DIY and professional installer portions of our business are
highly competitive, particularly in the more densely populated areas that
we serve. Some of our competitors are larger than we are and have greater
financial resources. In addition, some of our competitors are smaller than
we are overall but have a greater presence than we do in a particular
market. For a list of our principal competitors, see the
"Business--Competition" section of Item 1 of this Form 10-K.
We Cannot Assure Future Growth
We believe that our ability to open additional stores at an
accelerated rate will be a significant factor in achieving our growth
objectives for the future. Failure to achieve our growth objectives may
negatively impact the trading price of our common stock. Our ability to
accomplish our growth objectives is dependent, in part, on matters beyond
our control, such as weather conditions, zoning and other issues related to
new store site development, the availability of qualified management
personnel and general business and economic conditions. We cannot be sure
that our growth plans for 1999 and beyond will be achieved. For a
discussion of our growth strategies, see the "Business--Growth and
Expansion Strategies" section of Item 1 of this Form 10-K.
Acquisitions May Not Lead to Expected Growth
We acquired Hi/LO in January 1998 and plan to acquire Hinojosa in
April 1999. We expect to continue to acquire companies as an element of our
growth strategy. Acquisitions involve certain risks that could cause our
actual growth to differ from our expectations. For example: (1) we may not
be able to continue to identify suitable acquisition candidates or to
acquire additional companies at favorable prices or on other favorable
terms; (2) our management's attention may be distracted; (3) we may fail to
retain key acquired personnel; (4) we may assume unanticipated legal
liabilities and other problems; and (5) we may not be able to successfully
integrate the operations (accounting and billing functions, for example) of
businesses we acquire to realize economic, operational and other benefits.
Sensitivity to Regional Economic and Weather Conditions
All of our stores are located in the Central and Southern United
States. In particular, approximately 35% of our stores are located in
Texas. Therefore, our business is sensitive to the economic and weather
conditions of these regions. Unusually severe or inclement weather tends to
reduce sales, particularly to DIY customers.
Dependence Upon Key and Other Personnel
Our success has been largely dependent on the efforts of certain key
personnel, including David E. O'Reilly, Lawrence P. O'Reilly, Charles H.
O'Reilly, Jr., Rosalie O'Reilly Wooten and Ted F. Wise. Our business and
results of operations could be materially adversely affected by the loss of
the services of one or more of these individuals. Additionally, our
successful implementation and management of our growth and expansion
strategies will depend on our ability to continue to attract and retain
qualified personnel. We cannot be sure that we will be able to continue to
attract such personnel. For a further discussion of our management and
personnel, see the "Business" section of Item 1 and Item 4a of this Form
10-K and of our Proxy Statement on Form 14A for the 1999 Annual Meeting
of Shareholders.
Significant Voting Control is held by the O'Reilly Family
As of the date of this Form 10-K the O'Reilly family beneficially owns
approximately 33.0% of the then outstanding shares of our common stock. As
a result, the O'Reilly family acting together will continue to be able to
exercise significant voting control over the Company, including the
election of our directors and on any other matter being voted on by our
shareholders, including any merger, sale of assets or other change in
control.
Possible Volatility of Our Stock Price
The stock market and the price of our common stock may be subject to
volatile fluctuations based on general economic and market conditions. The
market price for our common stock may also be affected by our ability to
meet analysts' expectations. Failure to meet such expectations, even
slightly, could have an adverse effect on the market price of our common
stock. In addition, stock market volatility has had a significant effect on
the market prices of securities issued by many companies for reasons
unrelated to the operating performance of these companies. In the past,
following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such a company. If similar litigation were instituted against us,
it could result in substantial costs and a diversion of our management's
attention and resources, which could have an adverse effect on our
business.
Year 2000 Issue
Historically, certain computerized systems have used two digits rather
than four to define the applicable year. Computer equipment and software
and devices with imbedded technology that are time-sensitive may recognize
a date using "00" as the year 1900 rather than the year 2000, resulting in
system failure or miscalculations. This problem is generally referred to as
the "Year 2000 issue."
Risks posed by the Year 2000 issue could include a loss of
communications links with store locations, interruptions in the nightly
replenishment of store inventories, and the inability to process
transactions, send purchase orders or engage in similar routine business
activities. We presently believe that our approach to the Year 2000 issue,
including assessment, remediation, testing of necessary changes and
contingency planning will minimize the business risk of the Year 2000
issue. However, if we do not make the necessary modifications or
conversions or do not complete them in a timely manner, it could have a
material adverse effect on our operations. In addition, our operations
could be adversely affected if we fail to retain internal personnel
dedicated to the remediation of the Year 2000 issue, if our external
vendors fail to timely deliver software corrections and if our key business
partners fail to complete their Year 2000 remediation efforts. We discuss
our Year 2000 conversion in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of this Form 10-K.
Shares Eligible for Future Sale
All of the shares of common stock to be outstanding following the
completion of this offering will be tradeable without restriction by
persons other than our affiliates. All of the shares of common stock
currently held by our affiliates may be sold in reliance upon the exemptive
provisions of Rule 144 of the Securities Act of 1933, as amended, subject
to certain volume and other conditions imposed by such rule. We cannot
predict the effect, if any, that future sales of shares of common stock or
the availability of such shares for sale will have on the market price of
the common stock prevailing from time to time. Sales of substantial amounts
of common stock, or the perception that such sales might occur, could
adversely affect the prevailing market price of the common stock.
Item 2. Properties
The following table provides certain information regarding our
administrative offices and distribution centers and offices as of December
31, 1998:
Square
Location Principal Use(s) Footage Interest
Springfield, MO Distribution Center and Corporate
Offices 274,920 Owned
Springfield, MO Corporate Offices, Training and
Technical Center 35,580 Leased(a)
Springfield, MO Corporate Offices 13,780 Leased(b)
Kansas City, MO Distribution Center and Offices 130,662 Owned
Oklahoma City, OK Distribution Center and Offices 244,460 Owned
Houston, TX Distribution Center and Offices 446,104 Owned
- --------------
(a) 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.
Of the 491 stores that we operated at December 31, 1998, 253 stores
were owned, 185 stores were leased from unaffiliated parties and 53 stores
were leased from one of two real estate investment partnerships formed by
the O'Reilly family. Leases with unaffiliated parties generally provide for
payment of a fixed base rent, payment of certain tax, insurance and
maintenance expenses, and an original term of 10 years, subject to one or
more renewals at our option. The original terms of 16 stores leased from
unaffiliated parties expire prior to the end of 1999. 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 litigation as a result of a complaint
filed against Hi/LO in May 1997 by Charles Beresky. The plaintiff in this
lawsuit sought to certify a class action on behalf of persons or entities
in the States of Texas, Louisiana and California that have purchased a
battery from Hi/LO since May 1990. The complaint alleges that Hi/LO offered
and sold "old," "used" and "out of warranty" batteries as if the batteries
were new, resulting in claims for violations of deceptive trade practices,
breach of contract, negligence, fraud, negligent misrepresentation and
breach of warranty. The plaintiff is seeking, on behalf of the class, an
unspecified amount of compensatory and punitive damages, as well as
attorneys' fees and pre- and post-judgment interest. On July 27, 1998, the
Trial Court certified this class. We appealed the decision to certify the
class in the Court of Appeals for the Ninth District of Texas. On February
25, 1999, the Court of Appeals issued an opinion affirming the Trial
Court's decision to certify the class. We intend to contest this ruling by
seeking a mandamus from the Supreme Court of Texas. We believe that the
accusations made in this case are unfounded, and intend to defend this
lawsuit vigorously. Although the extent of damages suffered by any member
of the class is arguably minimal, it is difficult at this stage of the case
to determine the likely outcome of the case or to quantify the risk that we
face from this litigation.
In addition, we and our subsidiaries are involved in various other
legal proceedings incidental to the conduct of our business. Although we
cannot ascertain the amount of liability that we may incur from any of
these matters, we do not currently believe that, in the aggregate, they
will have a material adverse effect on our consolidated financial position,
results of operations or cash flow.
Item 4 Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year ended December 31, 1998.
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 47, has served as Executive Vice-President since
February 1997. Mr. Wise served as our Senior Vice-President from March 1993
until being elected to his current position.
James R. Batten, CPA, has served as Chief Financial Officer and
Treasurer since March 1994 and, in addition, as Vice-President of Finance
since October 1997. Mr. Batten served as our Finance Manager from January
1993 until being elected to his current position. From September 1986 until
joining us in January 1993, Mr. Batten was employed by the accounting firm
of Whitlock, Selim & Keehn.
PART II
Item 5 Market For Registrant's Common Equity And Related Shareholder
Matters
The material contained in the registrant's annual report to its
shareholders (the "Annual Shareholders' Report") under the captions "Market
Prices and Dividend Information" and "Number of Shareholders" included on
page 32, is incorporated here by this reference.
Item 6 Selected Financial Data
The material contained in the Annual Shareholders' Report under the caption
"Selected Consolidated Financial Data" included on pages 12 and 13, is
incorporated here by this reference.
Item 7 Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
The material contained in the Annual Shareholders' Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included on pages 14 through 18 is incorporated here by this
reference.
Item 7(A) Quantitative And Qualitative Disclosures About Market Risk
The Company's 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 and Young LLP, independent auditors, appearing in the
Annual Shareholders' Report under the captions "Consolidated Financial
Statements", "Notes to Consolidated Financial Statements" and "Report of
Independent Auditors" included on pages 19 through 31, are incorporated
here by this reference.
Item 9 Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
PART III
Item 10 Directors And Executive Officers Of The Registrant
The information regarding the directors of the Company contained in the
Company's Proxy Statement on Form 14A for the 1999 Annual Meeting of
Shareholders ("the Proxy Statement") under the caption "Election of Class
III Directors" is incorporated here by this reference. The Proxy Statement
is being filed with the Securities and Exchange Commission within 120 days
of the end of the Company's most recent fiscal year end. The information
regarding executive officers called for by item 401 of Regulation S-K is
included in Part I as Item 4A, in accordance with General Instruction G(3)
to Form 10-K, for the executive officers of the Company who are not also
directors.
The information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 included in the Company's Proxy Statement under the
caption "Compliance with Section 16(a) of the Securities Exchange Act of
1934" is incorporated here by this reference.
Item 11 Executive Compensation
The material in the Proxy Statement under the caption "Executive
Compensation" other than the material under the caption "Report of the
Compensation Committee" is incorporated here by this reference.
Item 12 Security Ownership Of Certain Beneficial Owners And Management
The material in the Proxy Statement under the caption "Security Ownership
of Management and Certain Beneficial Owners" is incorporated here by this
reference.
Item 13 Certain Relationships And Related Transactions
The material in the Proxy Statement under the caption "Transactions with
Insiders and Others" is incorporated here by this reference.
PART IV
Item 14 Exhibits, Financial Statement Schedule And Reports On Form 8-K
(a) 1. Financial Statements-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statements of O'Reilly Automotive,
Inc. and Subsidiaries included in the Annual Shareholders' Report of
the registrant for the year ended December 31, 1998, are incorporated
here by this reference in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements for the years ended
December 31, 1998, 1997 and 1996
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 regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(a) 3. Management Contracts and Compensatory Plans or Arrangements
Each of the Company's management contracts and compensatory plans or
arrangements 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 year ended December 31, 1998.
(c) Exhibits
See Exhibit Index on page E-1.
(d) Financial Statement Schedules
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------------------
Additions- Additions-
Charged Charged to
Balance at to Costs Other- Balance
Beginning and Accounts - Deductions- at End
Description of Period Expenses Describe Describe of Period
- ----------------------------------------------------------------------------------------------------
Year ended December 31, 1998:
Deducted from asset account:
Allowance for doubtful accounts $363 $250 $1,382 $ 1,382(1) $613
Inventory reserve 0 0 160(2) 0 160
Year ended December 31, 1997:
Deducted from asset account: 444 662 743(1) 363
Allowance for doubtful accounts 0
Year ended December 31, 1996:
Deducted from asset account: 386 592 534 (1) 444
Allowance for doubtful accounts 0
(1) Uncollectible accounts written off.
(2) Reserves assumed upon acquisition of Hi/LO Automotive, Inc.
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 25, 1999
By /s/ David E. O'Reilly
---------------------
David E. O'Reilly
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
Signature Title Date
/s/David E. O'Reilly Director, President and Chief March 25, 1999
David E. O'Reilly Executive Officer
(principal executive officer)
/s/James R. Batten Vice-President of Finance March 25, 1999
James R. Batten Chief Financial Officer and Treasurer
(principle financial officer)
/s/Lawrence P. O'Reilly Director, President and March 25, 1999
Lawrence P. O'Reilly Chief Operating Officer
/s/Charles H. O'Reilly, Jr. Director and Chairman of the Board March 25, 1999
Charles H. O'Reilly, Jr.
/s/Rosalie O'Reilly Wooten Director and Executive Vice-President March 25, 1999
Rosalie O'Reilly Wooten
/s/ Charles H. O'Reilly, Sr. Director and Chairman Emeritus March 25, 1999
Charles H. O'Reilly, Sr.
/s/ Jay D. Burchfield Director March 25, 1999
Jay D. Burchfield
/s/ Joe C. Greene Director March 25, 1999
Joe C. Greene
EXHIBIT INDEX
Exhibit No. Description
2.1* Plan of Reorganization Among the Registrant, Greene County
Realty Co. ("Greene County Realty") and Certain
Shareholders.
2.2 Agreement and Plan of Merger, dated as of December 23,
1997, by and among O'Reilly Automotive, Inc., Shamrock
Acquisition, Inc. and Hi/LO Automotive, Inc., filed as
Exhibit (c)(1) to the Registrant's Tender Offer Statement
on Schedule 14D-1 dated December 23, 1997.
3.1* Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
4.1* Form of Stock Certificate for Common Stock.
10.1* Form of Employment Agreement between the Registrant and
David E. O'Reilly, Lawrence P. O'Reilly, Charles H.
O'Reilly, Jr. and Rosalie O'Reilly Wooten.
10.2* Lease between the Registrant and O'Reilly Investment Company.
10.3* Lease between the Registrant and O'Reilly Real Estate Company.
10.4 Form of Retirement Agreement between the Registrant and
David E. O'Reilly, Lawrence P. O'Reilly, Charles H.
O'Reilly, Jr. and Rosalie O'Reilly Wooten, filed as Exhibit
10.4 to the Registrant's Annual Shareholders' Report on
Form 10-K for the year ended December 31, 1997.
10.7 (a) O'Reilly Automotive, Inc. Profit Sharing and Savings
Plan, filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8, File No. 33-73892, and incorporated
here by this reference.
10.8* (a) O'Reilly Automotive, Inc. 1993 Stock Option Plan.
10.9* (a) O'Reilly Automotive, Inc. Stock Purchase Plan.
10.10* (a) O'Reilly Automotive, Inc. Director Stock Option Plan.
10.11* Commercial and Industrial Real Estate Sale Contract between
Westinghouse Electric Corporation and Registrant.
10.12 * Form of Assignment, Assumption and Indemnification
Agreement between Greene County Realty and Shamrock
Properties, Inc.
10.13 Loan commitment and construction loan agreement between the
Registrant and Deck Enterprises, filed as Exhibit 10.13 to
the Registrant's Annual Shareholders' Report on Form 10-K
for the year ended December 31, 1993.
10.14 Lease between the Registrant and Deck Enterprises, filed as
Exhibit 10.14 to the Registrant's Annual Shareholders'
Report on Form 10-K for the year ended December 31, 1993.
10.15 Amended Employment Agreement between the Registrant and
Charles H. O'Reilly, Jr., filed as Exhibit 10.17 to the
Registrant's Annual Shareholders' Report on Form 10-K for
the year ended December 31, 1996.
10.16 O'Reilly Automotive, Inc. Performance Incentive Plan, filed
as Exhibit 10.18 (a) to the Registrant's Annual
Shareholders' Report on Form 10-K for the year ended
December 31, 1996.
10.17 Second Amendment to the O'Reilly Automotive, Inc. 1993
Stock Option Plan, filed as Exhibit 10.20 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.
10.18 Credit Agreement between the Registrant and NationsBank,
N.A. , dated October 16, 1997, filed as Exhibit 10.17 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
10.19 Credit Agreement between the Registrant and NationsBank,
N.A. , dated January 27, 1998, filed as Exhibit 10.20 to
the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.
10.20 Third Amendment to the O'Reilly Automotive, Inc. 1993 Stock
Option Plan, filed as Exhibit 10.21 to the Registrant's
Amended Quarterly Report on Form 10-Q/A for the quarter
ended March 31, 1998.
10.21 First Amendment to the O'Reilly Automotive, Inc. Directors'
Stock Option Plan, filed as Exhibit 10.22 to the
Registrant's Amended Quarterly Report on Form 10-Q/A for
the quarter ended March 31, 1998.
10.22 O'Reilly Automotive, Inc. Deferred Compensation Plan, filed
as Exhibit 10.23 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
10.23 Trust Agreement between the Registrant's Deferred
Compensation Plan and Bankers Trust, dated February 2,
1998, filed as Exhibit 10.24 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
13.1 Portions of the 1998 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.
27.1 Financial Data Schedule, filed herewith.
- ----------------
* Previously filed as Exhibit of same number to the Registration
Statement of the Registrant on Form S-1, File No. 33-58948, and
incorporated here by this reference.
(a) Management contract or compensatory plan or arrangement required
to be filed pursuant to Item 14(c) of Form 10-K.
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 13.1 - Portions of the 1998 Annual Report to Shareholders
Selected Consolidated Financial Data
- --------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except
per share data)
INCOME STATEMENT DATA:
Product sales $616,302 $316,399 $259,243 $201,492 $167,057 $137,164 $110,147 $94,937 $82,372 $71,935
Cost of goods sold,
including warehouse
and distribution
expenses 358,439 181,789 150,772 116,768 97,758 82,102 65,066 56,255 50,027 44,930
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 257,863 134,610 108,471 84,724 69,299 55,062 45,081 38,682 32,345 27,005
Operating, selling,
general and
administrative expenses 200,962 97,526 79,620 62,687 52,142 42,492 35,204 29,961 26,750 2 3,231
- --------------------------------------------------------------------------------------------------------------------------
Operating income 56,901 37,084 28,851 22,037 17,157 12,570 9,877 8,721 5,595 3,774
Other income
(expense),net (6,958) 472 1,182 236 376 216 204 (104) (566) (367)
Provision for
income taxes 19,171 14,413 11,062 8,182 6,461 4,556 3,686 3,167 1,837 1,269
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before
cumulative effects
of changes in
accounting principles 30,772 23,143 18,971 14,091 11,072 8,230 6,395 5,450 3,192 2,138
Cumulative effects of
changes in accounting
principles - - - - - - (163) - - -
- --------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations 30,772 23,143 18,971 14,091 11,072 8,230 6,232 5,450 3,192 2,138
Income (loss) from
discontinued operations - - - - - 48 129 (68) (186) (49)
- --------------------------------------------------------------------------------------------------------------------------
Net income $30,772 $23,143 $18,971 $14,091 $11,072 $8,278 $6,361 $5,382 $3,006 $2,089
==========================================================================================================================
Basic Earnings Per
Common Share:
Income per share from
continuing operations
before cumulative
effects of changes
in accounting principles $ 1.45 $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15
==========================================================================================================================
Income per share from
continuing operations $ 1.45 $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.42 $ 0.37 $ 0.22 $ 0.15
Income (loss) per share
from discontinued
operations - - - - - - 0.01 - (0.01) -
- --------------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.45 $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.21 $ 0.15
==========================================================================================================================
Cash dividends per share $ - $ - $ - $ - $ - $ - $0.0009 $0.0008 $0.0008 $0.0008
Weighted average common
shares outstanding 21,238 21,043 20,864 17,820 17,310 16,470 14,718 14,654 14,622 14,612
==========================================================================================================================
Earnings Per Common Share -
Assuming Dilution:
Income per share from
continuing operations
before cumulative
effects of changes in
accounting principles $ 1.42 $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15
==========================================================================================================================
Income per share from
continuing operations $ 1.42 $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.42 $ 0.37 $ 0.22 $ 0.15
Income (loss) per share
from discontinued
operations - - - - - 0.01 - - (0.01) -
- --------------------------------------------------------------------------------------------------------------------------
Net income per share $ 1.42 $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.21 $ 0.15
==========================================================================================================================
Weighted average common
shares outstanding -
adjusted (d) 21,602 21,277 21,032 17,902 17,389 16,523 14,718 14,654 14,622 14,612
==========================================================================================================================
SELECTED OPERATING DATA:
Number of stores at
year end (a) 491 259 219 188 165 145 127 116 112 106
Total store square
footage at year end
(in 000's) (b) 3,172 1,454 1,155 923 785 671 571 511 480 427
Weighted average
product sales per
store (in 000's) (b) $1,368 $1,306 $1,239 $1,101 $1,007 $949 $838 $759 $690 $637.
Weighted average
product sales per
square foot (b) $238.0 $235.8 $242.2 $227.3 $215.4 $208.7 $187.2 $174.4 $166.2 $160.0
Percentage increase in
same-store product sales(c) 6.8% 6.8% 14.4% 8.9% 8.9% 14.9% 11.4% 9.2% 11.2% 8.5%
BALANCE SHEET DATA:
Working capital $208,363 $93,763 $74,403 $80,471 $41,416 $41,193 $15,251 $13,434 $11,634 $9,853
Total assets 493,288 247,617 183,623 153,604 87,327 73,112 58,871 49,549 46,148 45,200
Short-term debt 13,691 130 3,154 231 311 495 3,462 1,298 2,281 3,897
Long-term debt, less
current portion 170,166 22,641 237 358 461 732 2,668 3,326 5,082 5,684
Long-term debt related
to discontinued
operations, less
current portion - - - - - - 9,873 10,316 9,901 9,961
Shareholders' equity 218,394 182,039 155,782 133,870 70,224 57,805 29,281 22,881 17,480 14,471
(a) The number of stores at year-end 1991 and 1992 are net of the
combinations in each such year of two stores located within one mile of
each other. Two stores were closed during 1997 and one was closed in 1998.
No other stores were closed during the periods presented. Additionally,
seven former Hi/LO stores located in California were sold in 1998.
(b) Total square footage includes normal selling, office, stockroom and
receiving space. Weighted average product sales per store and per square
foot are weighted to consider the approximate dates of store openings or
expansions.
(c) Same-store product sales data are calculated based on the change in
product sales of only those stores open during both full periods being
compared. Percentage increase in same-store product sales is calculated
based on store sales results which exclude sales of specialty machinery,
sales by outside salesmen and sales to employees.
(d) There was no additional dilution until 1993 when options were first
granted.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition, results of
operations and liquidity and capital resources should be read in
conjunction with our consolidated financial statements, related notes and
other financial information included elsewhere in this annual report.
We are one of the largest specialty retailers of automotive
aftermarket parts, tools, supplies, equipment and accessories in the United
States, selling our products to both DIY customers and professional
installers. Our stores carry an extensive product line consisting of new
and remanufactured automotive hard parts, maintenance items and
accessories, and a complete line of autobody paint and related materials,
automotive tools and professional service equipment.
In January 1998, we acquired Hi/LO for a cash purchase price of
approximately $49.3 million. At the time of the acquisition, Hi/LO had
$43.2 million of existing debt, among other liabilities, which we assumed.
Through the Hi/LO acquisition, we acquired a net of 182 stores and a
425,000 square foot distribution center located in Houston, Texas.
We calculate same store product sales based on the change in product
sales of only those stores open during both full periods being compared. We
calculate the percentage increase in same store product sales based on
store sales results which exclude sales of specialty machinery, sales by
outside salesmen and sales to employees.
Cost of goods sold consists primarily of product costs and warehouse
and distribution expenses. Cost of goods sold as a percentage of product
sales may be affected by variations in our product mix, price changes in
response to competitive factors and fluctuations in merchandise costs and
vendor programs.
Operating, selling, general and administrative expenses consist
primarily of store payroll, store occupancy, advertising expenses, other
store expenses and general and administrative expenses, including salaries
and related benefits of corporate employees, administrative office
occupancy expenses, data processing, professional expenses and other
related expenses.
Results of Operations
The following table sets forth certain of our summary income statement
data as a percentage of product sales for the years indicated:
Years Ended December 31,
1998 1997 1996
Product sales 100.0% 100.0% 100.0%
Cost of goods sold, including
warehouse and distribution expenses 58.2 57.5 58.2
------------------------------------------
Gross profit 41.8 42.5 41.8
Operating, selling, general
and administrative expenses 32.6 30.8 30.7
------------------------------------------
Operating income 9.2 11.7 11.1
Other income (expense) (1.1) 0.1 0.5
------------------------------------------
Income before income taxes 8.1 11.8 11.6
Provision for income taxes 3.1 4.5 4.3
==========================================
Net income 5.0% 7.3% 7.3%
==========================================
1998 Compared to 1997
Product sales increased $299.9 million, or 94.8% from $316.4 million
in 1997 to $616.3 million in 1998 due to 182 net additional stores acquired
from Hi/LO, 50 net additional stores opened during 1998, and a $33.1
million, or 6.8% increase in same store product sales. We believe that the
customer acceptance experienced by these new stores and the increased
product sales achieved by the existing stores is the result of our offering
of a broader selection of stock keeping units in most stores, an increased
promotional and advertising effort through a variety of media and localized
promotional events, and continued improvement in the merchandising and
store layouts of most stores. Also, our continued focus on serving
professional installers contributed to increased sales.
Gross profit increased 91.6% from $134.6 million (or 42.5% of product
sales) in 1997 to $257.9 million (or 41.8% of product sales) in 1998. The
decrease in gross profit margin was primarily attributable to the inclusion
of eleven months of Hi/LO operations, which resulted in a higher cost of
sales. The decrease was offset partially by continued improvements in our
product acquisition programs and conversions in the product lines in the
Hi/LO stores.
Operating, selling, general and administrative expenses increased
$103.4 million from $97.5 million (or 30.8% of product sales) in 1997 to
$201.0 million (or 32.6% of product sales) in 1998. The increase in these
expenses in dollar amount and as a percentage of sales primarily resulted
from the Hi/LO acquisition and net store openings, as well as the addition
of team members and facilities to support the increased level of our
operations.
Other income (expense) decreased by $7.5 million from income of $0.5
million in 1997 to expense of $7.0 million in 1998, primarily due to
increased interest expense from higher balances on long-term debt
principally resulting from the Hi-Lo acquisition and growth in the scope of
our operations.
Our provision for income taxes was 38.4% of income before income taxes
in 1998 and 1997.
Principally as a result of the foregoing, net income in 1998 was $30.8
million, or 5.0% of product sales, an increase of $7.6 million (or 33.0%)
from net income in 1997 of $23.1 million, or 7.3% of product sales.
1997 Compared to 1996
Product sales increased $57.2 million, or 22.1%, from $259.2 million
in 1996 to $316.4 million in 1997 due to 40 net additional stores opened
during 1997 and a $15.6 million, or 6.8%, increase in same store product
sales. We believe that the customer acceptance experienced by these new
stores and the increased product sales achieved by the existing stores is
the result of our continuation of media advertising during 1997 at levels
comparable to those set in 1996, an increase in the broad selection of
stock keeping units at the newer or recently renovated or relocated stores,
the increase in inventory levels at most stores, and the increasing
penetration of the general geographic markets in which we operate.
Gross profit increased 24.1% from $108.5 million (or 41.8% of product
sales) in 1996 to $134.6 million (or 42.5% of product sales) in 1997. The
increase in gross profit margin was primarily attributable to lower product
costs resulting from our obtaining increased volume discounts and other
economies of scale. The increase was partially offset by continued price
competition among automotive parts retailers.
Operating, selling, general and administrative expenses increased
$17.9 million from $79.6 million (or 30.7% of product sales) in 1996 to
$97.5 million (or 30.8% of product sales) in 1997. The increased dollar
amount of these expenses resulted primarily from the new store openings and
additions to administrative staff and facilities which occurred during 1997
in order to support our increased level of operations.
Our provision for income taxes increased from 36.8% of income before
income taxes in 1996 to 38.4% in 1997. The increase in the effective income
tax rate was primarily due to more of our sales occurring in states with
higher income tax rates. Additionally, in 1996, interest income of over
$400,000 was tax exempt, but all interest income was taxable in 1997.
Principally as a result of the foregoing, net income in 1997 was $23.1
million, or 7.3% of product sales, an increase of $4.1 million (or 21.6%)
from net income in 1996 of $19.0 million, or 7.3% of product sales.
Liquidity and Capital Resources
Net cash provided by operating activities was $4.9 million in 1996 and
$17.9 million in 1997. Net cash used in operating activities was $19.1
million in 1998. The increase in 1997 compared to 1996 is principally the
result of increases in net income and accounts payable and accrued
expenses, partially offset by an increase in inventory. The increase in
inventory is due to the addition in 1997 of 40 net stores and an increase
in inventory levels at most stores and the distribution centers. The net
cash used in operating activities in 1998 is principally the result of
increases in inventory, amounts receivable from vendors, refundable income
taxes, accounts receivable and accrued payroll, net of increases in
accounts payable and deferred income taxes. The increase in inventory is
due to the addition of 50 net stores, an increase in inventory levels at
many stores particularly the acquired Hi-Lo stores and increases in
inventory at the Oklahoma City distribution center, due to its expansion,
and the Houston distribution center, to improve order fill and service
levels.
Net cash used in investing activities was $11.2 million in 1996, $37.7
million in 1997 and $100.8 million in 1998. The increase in cash used in
1997 was primarily due to increased capital expenditures without any
offsetting proceeds from the sale of short-term investments. The increase
in cash used in 1998 was primarily due to the purchase of Hi-Lo and
increased capital expenditures.
Capital expenditures were $34.5 million in 1996, $37.2 million in 1997
and $57.7 million in 1998. These expenditures were primarily related to the
opening of new stores as well as the relocation or remodeling of existing
stores. We opened 31 new stores and remodeled or relocated 32 stores in
1996. In 1997, we opened 40 net stores and remodeled or relocated 28
stores. In 1998, we opened 50 net stores and renovated or relocated 18
stores. Also, in 1996, 1997 and 1998, we purchased real estate for new
stores and store relocations totaling approximately $7.8 million, $8.1
million and $9.9 million, respectively. In 1997, we purchased real estate
for the Des Moines distribution center totaling $0.7 million. Construction
costs for the Des Moines distribution center, which is scheduled to be
completed in April 1999, totaled $3.7 million at December 31, 1998.
Our continuing store expansion program requires significant capital
expenditures and working capital principally for inventory requirements.
The costs associated with the opening of a new store (including the cost of
land acquisition, improvements, fixtures, inventory and computer equipment)
are estimated to average approximately $900,000 to $1.1 million; however,
such costs may be significantly reduced where we lease, rather than
purchase, the store site. Although the cost to acquire the business of an
independently owned parts store varies, depending primarily upon the amount
of inventory and the amount, if any, of real estate being acquired, we
estimate that the average cost to acquire such a business and convert it to
one of our stores is approximately $400,000. We plan to finance our
expansion program through cash expected to be provided from operating
activities and available borrowings, after the application of the proceeds
from this offering.
On July 8, 1997, our Board of Directors declared a two-for-one stock
split effected in the form of a 100% stock dividend to all shareholders of
record as of July 31, 1997. The stock dividend was paid on August 31, 1997.
In order to fund the Hi-Lo acquisition, our continuing store expansion
program, and our working capital and general corporate needs, we replaced
our lines of credit in January 1998 with an unsecured, five-year syndicated
credit facility totaling $173 million. The facility is comprised of a $125
million revolving loan, a $5 million sublimit for the issuance of letters
of credit and a $48 million term loan. This credit facility is guaranteed
by our subsidiaries. At December 31, 1998, the effective interest rate on
the revolving and term loan portions, which each mature on January 27,
2003, was 6.22% per annum. At December 31, 1998, there were no borrowings
available under this credit facility.
In January 1999, we amended the above credit facility to increase the
amount available under the revolving facility by $35 million. The
additional $35 million is available until July 31, 1999 or until a "capital
markets event" occurs. We believe that this offering will constitute a
capital markets event. The additional $35 million bears interest at the
same rate as the revolving credit facility discussed above.
We believe that the proceeds from this offering, combined with our
existing cash, short-term investments, cash expected to be provided by
operating activities, available bank credit facilities and trade credit
will be sufficient to fund both our short and long-term capital needs for
the foreseeable future.
Inflation and Seasonality
We succeeded, in many cases, in reducing the effects of merchandise
cost increases principally by taking advantage of vendor incentive
programs, economies of scale resulting from increased volume of purchases
and selective forward buying. As a result, we do not believe that our
operations have been materially affected by inflation.
Our business is somewhat seasonal primarily as a result of the impact
of weather conditions on store sales. Store sales and profits have
historically been higher in the second and third quarters (April through
September) of each year than in the first and fourth quarters.
Quarterly Results
The following table sets forth certain quarterly unaudited operating
data for fiscal 1997 and 1998. The unaudited quarterly information includes
all adjustments which management considers necessary for a fair
presentation of the information shown.
The unaudited operating data presented below should be read in
conjunction with our consolidated financial statements and related notes
included elsewhere in this annual report, and the other financial
information included here.
Fiscal 1998
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Product sales........................... $118,269 $165,242 $172,784 $160,007
Gross profit............................ 50,669 66,201 69,345 71,648
Operating income........................ 10,602 13,745 15,435 17,119
Net income.............................. 5,819 7,672 8,361 8,920
Net income per common share............. 0.28 0.36 0.39 0.42
Net income per common
share--assuming dilution.............. $ 0.27 $ 0.36 $ 0.39 $ 0.41
Fiscal 1997
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands, except per share data)
Product sales........................... $68,472 $82,448 $87,517 $77,962
Gross profit............................ 29,191 34,715 36,531 34,173
Operating income........................ 7,928 9,493 10,467 9,196
Net income.............................. 5,007 6,082 6,621 5,433
Net income per common share............. 0.24 0.29 0.31 0.26
Net income per common
dilution share--assuming.............. $ 0.24 $ 0.29 $ 0.31 $ 0.25
Year 2000 Issue
We have appointed an internal Year 2000 issue project manager and
remediation team and have adopted a four phase approach of assessment,
remediation, testing and contingency planning. The scope of the project
includes our review of all internal software, hardware and operating
systems and an assessment of the risk to our business posed by any lack of
vendor preparedness with respect to the Year 2000 issue. We have completed
the initial assessment of all internal systems, are progressing with the
remediation and testing phases, and have begun contingency planning for
information technology systems. We believe that this approach of assessment
(including prioritization by business risk), remediation (including
conversions to new software), testing of necessary changes, and contingency
planning will minimize the business risk of the Year 2000 issue from
internal systems.
We are utilizing internal personnel to correct, replace and test our
software and plan to complete the Year 2000 project no later than September
1, 1999. The total cost of the Year 2000 project is estimated at $100,000.
Of the total project cost, approximately $25,000 represents the purchase of
replacements or upgrades of software and hardware, which will be
capitalized. We will expense the remaining portion of the project cost as
incurred during 1999. As of December 31, 1998, we had spent approximately
$33,060 on the Year 2000 project.
We have established ongoing communications with all our significant
vendors to monitor their progress in resolving their issues related to the
Year 2000 issue. Many of such vendors have informed us that they are making
substantial progress in resolving their Year 2000 issue. However, the most
likely worst case scenario for us would entail failure of one or more of
our significant vendors to continue operations (even temporarily) following
transition to the year 2000. We have also contacted suppliers of products
significant to our operations containing embedded chips to monitor their
progress in resolving issues related to the Year 2000 issue. No material
issues have been identified to date as a result of these contacts. We
cannot guarantee that our business partners will adequately address issues
related to the Year 2000 issue in a timely manner or that the failure of
our business partners to correct these issues would not have a material
adverse effect on the Company.
We have completed contingency plans to be used in the event of a
business interruption caused by the Year 2000 issue for some, but not all,
of our internal information technology systems. Such plans are being
developed for some of our other systems. Elements of our contingency plans
include switching vendors and utilizing back-up systems that do not rely on
computers.
The cost and time estimated for the Year 2000 project are based on our
best current estimates. We cannot guarantee that these estimates will be
achieved and that planned results will be achieved.
New Accounting Standards
Recent pronouncements of the FASB, which we were required to adopt in
1998, include SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. The statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The adoption of
SFAS No. 130 had no effect on our financial statements since we have no
items of comprehensive income.
SFAS No. 131 supersedes SFAS No. 14 and establishes new standards for
the way that public companies report selected information about operating
segments in annual financial statements and requires that those companies
report selected information about segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The adoption of SFAS No. 131 had no effect on our financial
statements since we operate in a single segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted in years beginning after June 15, 1999. The Company
does not anticipate that the adoption of SFAS No. 133 will have a
significant effect on the financial position or results of operations of
the Company.
Consolidated Balance Sheets
December 31,
1998 1997
----------------------
(In thousands)
Assets
Current assets:
Cash $ 1,728 $ 2,285
Short-term investments 500 1,000
Accounts receivable, less allowance for doubtful accounts
of $613 in 1998 and $363 in 1997 27,580 12,469
Amounts receivable from vendors 26,660 4,969
Inventory 246,012 111,848
Refundable income taxes 3,026 --
Deferred income taxes 2,838 1,424
Other current assets 2,538 145
-----------------------
Total current assets 310,882 134,140
Property and equipment, at cost:
Land 40,131 28,000
Buildings 81,770 53,507
Leasehold improvements 17,898 9,230
Furniture, fixtures and equipment 56,897 36,362
Vehicles 13,511 10,434
-----------------------
210,207 137,533
Accumulated depreciation and amortization 39,256 29,093
-----------------------
170,951 108,440
Deferred income taxes 3,178 --
Notes receivable 4,137 2,280
Other assets 4,140 2,757
=======================
Total assets $493,288 $247,617
=======================
Liabilities and shareholders' equity Current liabilities:
Note payable to bank $ 5,000 $ --
Accounts payable 66,737 29,713
Accrued expenses 18,446 6,386
Accrued payroll 3,645 1,647
Income taxes payable -- 2,501
Current portion of long-term debt 8,691 130
-----------------------
Total current liabilities 102,519 40,377
Long-term debt, less current portion 170,166 22,641
Other liabilities 2,209 415
Deferred income taxes -- 2,145
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares--5,000,000
Issued and outstanding shares--none -- --
Common stock, $.01 par value:
Authorized shares--30,000,000
Issued and outstanding shares--21,349,700 in 1998 and
21,125,493 in 1997 213 211
Additional paid-in capital 82,658 77,077
Retained earnings 135,523 104,751
-----------------------
Total shareholders' equity 218,394 182,039
-----------------------
Total liabilities and shareholders' equity $493,288 $247,617
=======================
See accompanying notes.
Consolidated Statements Of Income
Years ended
December 31,
1998 1997 1996
----------------------------------------
(In thousands, except per share data)
Product sales $616,302 $316,399 $259,243
Cost of goods sold, including warehouse and
distribution expenses 358,439 181,789 150,772
Operating, selling, general and administrative 200,962 97,526 79,620
expenses
----------------------------------------
559,401 279,315 230,392
----------------------------------------
Operating income 56,901 37,084 28,851
Other income (expense):
Interest expense (8,126) (139) (37)
Interest income 396 198 676
Other, net 772 413 543
----------------------------------------
(6,958) 472 1,182
----------------------------------------
Income before income taxes 49,943 37,556 30,033
Provision for income taxes 19,171 14,413 11,062
----------------------------------------
Net income $30,772 $23,143 $18,971
========================================
Basic income per common share:
Net income per common share $ 1.45 $ 1.10 $ 0.91
========================================
Weighted average common shares outstanding 21,238 21,043 20,864
========================================
Income per common share--assuming dilution:
Net income per common share--assuming dilution $ 1.42 $ 1.09 $ 0.90
========================================
Adjusted weighted average common shares outstanding 21,602 21,277 21,032
========================================
See accompanying notes.
Consolidated Statements Of Shareholders' Equity
Additional
Common Stock Paid-In Retained
Shares Par Value Capital Earnings Total
------------------------------------------------------
(In thousands)
Balance at December 31, 1995 20,724 $ 104 $71,024 $62,742 $133,870
Issuance of common stock under
employee benefit plans 93 -- 1,509 -- 1,509
Issuance of common stock under stock
option plans 120 1 1,431 -- 1,432
Net income -- -- -- 18,971 18,971
------------------------------------------------------
Balance at December 31, 1996 20,937 105 73,964 81,713 155,782
Two-for-one stock split -- 105 -- (105) --
Issuance of common stock under
employee benefit plans 73 -- 1,331 -- 1,331
Issuance of common stock under stock
option plans 115 1 1,481 -- 1,482
Tax benefit of stock options exercised. -- -- 301 -- 301
Net income -- -- -- 23,143 23,143
------------------------------------------------------
Balance at December 31, 1997 21,125 211 77,077 104,751 182,039
Issuance of common stock under
employee benefit plans 92 1 2,720 -- 2,721
Issuance of common stock under stock
option plans 133 1 2,022 -- 2,023
Tax benefit of stock options exercised. -- -- 839 -- 839
Net income -- -- -- 30,772 30,772
------------------------------------------------------
Balance at December 31, 1998 21,350 $ 213 $82,658 $135,523 $218,394
======================================================
See accompanying notes.
Consolidated Statements Of Cash Flows
Years ended December 31,
1998 1997 1996
----------------------------------
(In thousands)
Operating activities
Net income $ 30,772 $23,143 $18,971
Adjustments to reconcile net income to net cash
provided by (used in)
Operating activities:
Depreciation and amortization 12,164 8,276 6,105
Provision for doubtful accounts 250 662 592
Gain on sale of property and equipment (134) (44) (281)
Deferred income taxes 7,629 (1,042) 1,483
Common stock contributed to employee benefit plans 1,629 1,331 1,028
Tax benefit of stock options exercised 839 301 --
Postretirement benefits 12 12 12
Changes in operating assets and liabilities, net of the
effects of the acquisition:
Accounts receivable (5,809) (1,835) (2,428)
Amounts receivable from vendors (21,691) (2,100) (473)
Inventory (53,328) (27,939) (24,930)
Refundable income taxes (5,527) 172 564
Other current assets (179) (446) 603
Other assets (1,753) (581) (709)
Accounts payable 20,071 12,425 4,275
Accrued expenses (525) 2,433 830
Accrued payroll (3,533) 604 (765)
Income taxes payable -- 2,501 --
----------------------------------
Net cash provided by (used in) operating
activities (19,113) 17,873 4,877
Investing activities
Purchases of property and equipment (57,732) (37,180) (34,459)
Acquisition, net of cash acquired (49,296) -- --
Proceeds from sale of property and equipment 6,038 293 801
Purchases of short-term investments -- -- (12,494)
Proceeds from sale of short-term investments 500 -- 34,904
Payments received on notes receivable 372 898 51
Advances made on notes receivable (650) (1,668) (21)
----------------------------------
Net cash used in investing activities (100,768) (37,657) (11,218)
Financing activities
Borrowings on notes payable to bank 5,000 -- 3,000
Proceeds from issuance of long-term debt 157,860 20,500 --
Principal payments on long-term debt (46,651) (1,120) (198)
Net proceeds from issuance of common stock 3,115 1,482 1,913
----------------------------------
Net cash provided by financing activities 119,324 20,862 4,715
----------------------------------
Net increase (decrease) in cash (557) 1,078 (1,626)
Cash at beginning of year 2,285 1,207 2,833
----------------------------------
Cash at end of year $ 1,728 $2,285 $1,207
==================================
See accompanying notes.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
O'Reilly Automotive, Inc. ("the Company") is a specialty retailer and
supplier of automotive aftermarket parts, tools, supplies and accessories
to both the "do-it-yourself" customer and the professional installer
throughout Texas, Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana,
Nebraska and
Illinois.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
The Company recognizes sales upon shipment of products.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Inventory
Inventory, which consists of automotive hard parts, maintenance items,
accessories and tools, is stated at the lower of cost or market. Cost has
been determined using the last-in, first-out ("LIFO") method. If the
first-in, first-out ("FIFO") method of costing inventory had been used by
the Company, inventory would have been $246,402,000 and $119,135,000 as of
December 31, 1998 and 1997, respectively.
Amounts Receivable from Vendors
Amounts receivable from vendors consist primarily of amounts due the
Company for change-over merchandise, rebates and other allowances.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided
on straight-line and accelerated methods over the estimated useful lives of
the assets. Service lives for property and equipment generally range from
three to 40 years. Leasehold improvements are amortized over the terms of
the underlying leases. Maintenance and repairs are charged to expense as
incurred. Upon retirement or sale, the cost and accumulated depreciation
are eliminated and the gain or loss, if any, is included in the
determination of net income as a component of other income (expense). The
Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
fully recoverable.
The company capitalizes interest costs as a component of construction
in progress, based on the weighted average rates paid for long-term
borrowings. Total interest costs capitalized for the years ended December
31, 1998 and 1997, were $1,213,000 and $527,000, respectively. There were
no interest costs capitalized during the year ended December 31, 1996.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
109. The liability method provides that deferred tax assets and liabilities
are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising
expense charged to operations amounted to $8,326,000, $3,437,000 and
$3,156,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Financial Instrument
The Company utilizes interest rate swap agreements to manage interest
rate risk on its floating rate debt. During 1998, the Company entered into
an interest-rate swap agreement to modify the interest characteristics of
its outstanding long-term debt from a floating rate to a fixed rate basis.
This agreement involves the receipt of floating rate amounts in exchange
for fixed rate interest payments over the life of the agreement without an
exchange of the underlying principal amount. The differential to be paid or
received is accrued as interest rates change and recognized as an
adjustment to interest expense related to the debt. The related amount
payable to or receivable from the counterparty is included in other
liabilities or assets. The fair value of the swap agreement is not
recognized in the consolidated financial statements and approximates its
carrying cost.
Preopening Costs
Costs associated with the opening of new stores, which consist
primarily of payroll and occupancy costs, are charged to operations as
incurred.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed in Note 11, the alternative fair value accounting provided for
under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.
Concentration of Credit Risk
The Company grants credit to certain customers who meet the Company's
pre-established credit requirements. Generally, the Company does not
require security when trade credit is granted to customers. Credit losses
are provided for in the Company's consolidated financial statements and
consistently have been within management's expectations.
The Company has provided long-term financing to a company, through a
note receivable, for the construction of an office building which is leased
by the Company (see Note 7). The note receivable, amounting to $2,203,000
and $2,271,000 at December 31, 1998 and 1997, respectively, bears interest
at 6% and is due in January 2005.
The carrying value of the Company's financial instruments, including
cash, short-term investments, accounts receivable, accounts payable and
long-term debt, as reported in the accompanying consolidated balance
sheets, approximates fair value.
New Accounting Pronouncements
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which established new rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 had no
impact on the Company's financial statements.
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" which
established new standards for the way public companies report information
about operating segments in annual and interim financial statements. The
Company operates in a single segment and accordingly, no segment
disclosures are warranted for the years ended December 31, 1998, 1997 and
1996.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted in years beginning after June 15, 1999. The Company
does not anticipate that the adoption of SFAS No. 133 will have a
significant effect on the financial position or results of operations of
the Company.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements to conform to the 1998 presentation.
NOTE 2--ACQUISITION
Effective January 31, 1998, the Company acquired 100% of the
outstanding capital stock of Hi-Lo Automotive, Inc. and its subsidiaries
(Hi/LO). Hi/LO was a specialty retailer supplying automotive aftermarket
tools, supplies and accessories principally throughout Texas and Louisiana.
The purchase price was approximately $49.3 million, including acquisition
costs. The purchase price was financed with long-term borrowings under the
Company's credit facility. The acquisition was accounted for using the
purchase method of accounting and accordingly, the results of operations of
Hi/LO have been included in the Company's results of operations since the
date of acquisition. The purchase price was allocated to assets acquired
and liabilities assumed based on their estimated fair values. The excess of
net assets acquired over the purchase price, which totaled approximately
$9.7 million, has been applied as a reduction to the acquired property and
equipment. Additional purchase liabilities recorded included approximately
$5,622,000 for severance and certain costs associated with the closure and
consolidation of certain acquired stores. At December 31, 1998,
approximately $2,005,000 of the consolidation related costs remained on the
accompanying balance sheet. The Company expects to complete its
consolidation of facilities during 1999.
The following unaudited pro forma financial information presents the
combined historical results of the Company and Hi/LO as if the acquisition
had occurred at the beginning of 1998 and 1997 after giving effect to
certain adjustments, including the application of the excess of net assets
acquired over the purchase price to the acquired property and equipment and
resulting effect on depreciation, increased interest expense on long-term
debt related to the acquisition, and the related income tax effects.
1998 1997
-----------------------------------
(In thousands, except per share data)
Product sales $ 634,072 $ 554,719
Net income $ 29,443 $ 22,782
Net income per share--assuming dilution $ 1.36 $ 1.07
The pro forma combined results are not necessarily indicative of the
results that would have occurred if the acquisition had been completed as
of the beginning of each of the years presented, nor are they necessarily
indicative of future consolidated results.
NOTE 3--SHORT-TERM INVESTMENTS
The Company's short-term investments are classified as
available-for-sale in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," and are carried at cost, which
approximates fair market value. At December 31, 1998 and 1997, short-term
investments consisted of preferred equity securities.
NOTE 4--RELATED PARTIES
The Company leases certain land and buildings related to its O'Reilly
Auto Parts stores under six-year operating lease agreements with O'Reilly
Investment Company and O'Reilly Real Estate Company, partnerships in which
certain shareholders of the Company are partners. Generally, these lease
agreements provide for renewal options for an additional six years at the
option of the Company (see Note 7). Rent expense under these operating
leases totaled $2,158,000 in 1998, $2,122,000 in 1997 and $1,729,000 in
1996.
NOTE 5--NOTE PAYABLE TO BANK
The Company had available a short-term unsecured bank line of credit
providing for maximum borrowings of $5,000,000, all of which was
outstanding at December 31, 1998. There were no borrowings outstanding at
December 31, 1997. The line of credit bears interest at LIBOR plus 1.00%
(6.63% at December 31, 1998). The line of credit was renewed and extended
at January 28, 1999, and expires on April 28, 1999.
NOTE 6--LONG-TERM DEBT
At December 31, 1998, the Company had available a credit facility
providing for maximum borrowings of $173 million. The facility is comprised
of a revolving credit facility of $125 million, and a term loan of $48
million. At December 31, 1998, $121,401,000 of the revolving credit
facility and $48 million of the term loan was outstanding. The credit
facility, which bears interest at LIBOR plus 0.50% (6.22% at December 31,
1998), expires in January 2003. In January 1999, the Company amended the
credit facility to increase the amount of available borrowings under the
revolving credit facility by $35 million (see Note 16). In addition, the
Company had outstanding borrowings totaling $7,705,000 under its
non-binding advised line of credit at December 31, 1998. This line of
credit, which bears interest at 6.6%, was refinanced in connection with the
Company's amendment of its credit facility in January 1999. At December 31,
1997, the Company had outstanding borrowings under its then existing
revolving credit facilities amounting to $22,500,000.
During 1998, the Company leased certain office equipment under
capitalized leases. Pursuant to the terms of the lease agreements, the
Company has committed to pay approximately $57,000 per month over three
years. The present value of the future minimum lease payments under these
agreements totaled $1,496,000 at December 31, 1998, which has been
classified as long-term debt in the accompanying consolidated financial
statements.
Additionally, the Company has various unsecured notes payable to
individuals, amounting to $255,032 and $271,000, at December 31, 1998 and
1997, respectively. The notes bear interest at rates ranging from 8% to 9%
and are due in monthly installments of approximately $2,600 including
interest. The notes mature in varying amounts between 1999 and 2000.
Indirect borrowings under letters of credit and guarantees of
indebtedness of others totaled $1,990,000 and $633,000 at December 31, 1998
and 1997, respectively.
Principal maturities of long-term debt for each of the next five years
ending December 31 are as follows (amounts in thousands):
1999 $ 8,691
2000 13,164
2001 12,657
2002 15,011
2003 129,118
Thereafter 216
--------
$178,857
========
Cash paid by the Company for interest during the years ended December
31, 1998, 1997 and 1996 amounted to $8,509,000, $642,000 and $35,000,
respectively.
NOTE 7--COMMITMENTS
Lease Commitments
The Company leases certain office space, property and equipment under
long-term, noncancelable operating leases. Future minimum rental payments,
including commitments of $2,250,200 per year through 2004 in connection
with the related-party leases described in Note 4, for each of the next
five years ending December 31 and in the aggregate are as follows (amounts
in thousands):
1999 $11,824
2000 10,695
2001 10,281
2002 9,030
2003 7,675
Thereafter 34,000
--------
$83,505
========
A portion of the Company's retail stores and certain equipment are
leased. Most of these leases include renewal options and some include
options to purchase and provisions for percentage rent based on sales.
Rental expense amounted to $13,862,000, $4,136,000 and $3,348,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 7--COMMITMENTS
Other Commitments
During October 1998, the Company announced that it had entered into a
definitive agreement to purchase substantially all of the assets of
Hinojosa Auto Parts ("Hinojosa") effective April 1, 1999. Hinojosa is a
specialty retailer of auto parts which operates 10 stores and a
distribution center in the Rio Grande Valley along the Texas/Mexico border.
Under the terms of the agreement, the Company will pay approximately $6
million in cash. The Company will not assume any liabilities of Hinojosa.
The Company also had construction commitments which totaled
approximately $12.4 million at December 31, 1998.
NOTE 8--LEGAL PROCEEDINGS
The Company is currently involved in litigation as a result of a
complaint filed against Hi/LO in May 1997. The plaintiff in this lawsuit
sought to certify a class action on behalf of persons or entities in the
states of Texas, Louisiana and California that have purchased a battery
from Hi/LO since May 1990. The complaint alleges that Hi/LO offered and
sold "old," "used" and "out of warranty" batteries as if the batteries were
new, resulting in claims for violations of deceptive trade practices,
breach of contract, negligence, fraud, negligent misrepresentation and
breach of warranty. The plaintiff is seeking, on behalf of the class, an
unspecified amount of compensatory and punitive damages, as well as
attorneys' fees and pre- and post-judgment interest. On July 27, 1998, the
Trial Court certified this class. The Company appealed the decision to
certify the class in the Court of Appeals for the Ninth District of Texas.
On February 25, 1999, the Court of Appeals issued an opinion affirming the
Trial Court's decision to certify the class. The Company intends to contest
this ruling by seeking a mandamus from the Supreme Court of Texas. The
Company believes that the accusations made in this case are unfounded, and
intends to defend this lawsuit vigorously. Although it is difficult at this
stage to determine the likely outcome of the case, the Company believes
that this lawsuit will not have a material adverse effect on the Company's
results of operations or financial position.
In addition, the Company and its subsidiaries are involved in various
other legal proceedings incidental to the conduct of its business. Although
the Company cannot ascertain the amount of liability that it may incur from
any of these matters, it does not currently believe that, in the aggregate,
they will have a material adverse effect on the consolidated financial
position, results of operations or cash flow of the Company.
NOTE 9--INTEREST RATE RISK MANAGEMENT
During 1998, the Company entered into an interest rate swap agreement
to effectively convert a portion of its floating rate long term debt to a
fixed rate basis, thereby reducing the impact of interest rate changes on
future income. Pursuant to this pay-fixed swap agreement, the Company
agreed to exchange, at specified intervals, the difference between the
fixed and the floating interest amounts calculated on the notional amount
of the swap agreement which totaled $100 million at December 31, 1998. The
Company's fixed interest rate under the swap agreement was 5.69% and the
counterparty's floating rate was 5.45% at December 31, 1998.
NOTE 10--EMPLOYEE BENEFIT PLANS
The Company sponsors a contributory profit sharing and savings plan
that covers substantially all employees who are 21 years of age with at
least six months of service. Employees may contribute up to 15% of their
annual compensation subject to Internal Revenue Code maximum limitations.
The Company has agreed to make matching contributions equal to 50% of the
first 2% of each employee's contribution and 25% of the next 2% of each
employee's contribution. Additional contributions to the plan may be made
as determined annually by the Board of Directors. After three years of
service, Company contributions and earnings thereon vest at the rate of 20%
per year of service with the Company. Company contributions charged to
operations amounted to $1,818,000 in 1998, $1,485,000 in 1997 and
$1,229,000 in 1996. Company contributions, in the form of common stock, to
the profit-sharing and savings plan to match employee contributions during
the years ended December 31 were as follows:
Year Market
Contributed Shares Value
------------------------------------
1998 15,719 $514,000
1997 20,913 415,000
1996 19,786 344,000
Profit-sharing contributions accrued at December 31, 1998, 1997 and
1996 were funded in the next year through issuance of shares of the
Company's common stock as follows:
Year Market
Funded Shares Value
------------------------------------
1998 36,193 $1,070,000
1997 49,540 884,000
1996 39,652 684,000
The Company also sponsors an unfunded noncontributory defined benefit
health care plan, which provides certain health benefits to retired
employees. According to the terms of this plan, retirees' annual benefits
are limited to $1,000 per employee starting at age 66 for employees with 20
or more years of service. Postretirement benefit costs for each of the
years ended December 31, 1998, 1997 and 1996 amounted to $12,000.
Additionally, the Company has adopted a stock purchase plan under
which 500,000 shares of common stock are reserved for future issuance.
Under the plan, substantially all employees and non-employee directors have
the right to purchase shares of the Company's common stock monthly at a
price equal to 85% of the fair market value of the stock. Under the plan,
37,316 shares were issued at an average price of $30.09 per share during
1998, 32,584 shares were issued at an average price $17.49 per share during
1997 and 32,936 shares were issued at an average price of $14.61 per share
during 1996.
The Company adopted a performance incentive plan for the Company's
senior management under which 200,000 shares of restricted stock are
reserved for future issuance. Under the plan, 2,679, 1,386 and 556 shares
were issued during 1998, 1997 and 1996, respectively.
NOTE 11--STOCK OPTION PLANS
The Company has a stock option plan under which incentive stock
options or nonqualified stock options may be granted to officers and key
employees. An aggregate of 3,000,000 shares of common stock is reserved for
future issuance under this plan. The exercise price of options granted
shall not be less than the fair market value of the stock on the date of
grant and the options will expire no later than 10 years from the date of
grant. Options granted pursuant to the plan become exercisable no sooner
than six months from the date of grant. In the case of a Shareholder owning
more than 10% of the outstanding stock of the Company, the exercise price
of an incentive option may not be less than 110% of the fair market value
of the stock on the date of grant, and such options will expire no later
than 10 years from the date of grant. Also, the aggregate fair market value
of the stock with respect to which incentive stock options are exercisable
for the first time by any individual in any calendar year may not exceed
$100,000. A summary of outstanding stock options is as follows:
Number
Price per Share Of Shares
----------------------------------
Outstanding at December 31, 1995 $ 8.75-$16.88 763,000
Granted ..................... 14.38- 20.00 51,500
Exercised ..................... 8.75- 15.50 (120,300)
Canceled ..................... 13.25- 19.54 (35,500)
-----------------
Outstanding at December 31, 1996 8.75- 20.00 658,700
Granted ..................... 15.63- 28.00 755,000
Exercised ..................... 8.75- 18.38 (71,500)
Canceled ..................... 8.75- 17.88 (6,000)
-----------------
Outstanding at December 31, 1997 8.75- 28.00 1,336,200
Granted ..................... 24.75- 45.81 411,875
Exercised ..................... 8.75- 32.13 (119,300)
Canceled ..................... 8.75- 41.75 (34,350)
Forfeitures.................... 8.75 (2,500)
=================
Outstanding at December 31, 1998 $12.13-$45.81 1,591,925
=================
Options to purchase 799,550, 521,700 and 637,700 shares of common
stock were exercisable at December 31, 1998, 1997 and 1996, respectively.
The Company also maintains a stock option plan for non-employee
directors of the Company under which 150,000 shares of common stock are
reserved for future issuance. All director stock options are granted at
fair market value on the date of grant and expire on the earlier of
termination of service to the Company as a director or seven years. Options
granted under this plan become exercisable six months from the date of
grant. A summary of outstanding stock options is as follows:
Number
Price per Share Of Shares
----------------------------------
Outstanding at December 31, 1995 $ 8.75-$13.50 30,000
Granted .................... 18.19 10,000
-----------------
Outstanding at December 31, 1996 8.75- 18.19 40,000
Granted .................... 18.56- 28.88 15,000
Exercised .................... 8.75- 18.19 (20,000)
Canceled .................... 18.56 (5,000)
-----------------
Outstanding at December 31, 1997 8.75- 18.19 30,000
Granted .................... 27.00 10,000
Exercised .................... 8.75 (5,000)
Canceled .................... -- --
=================
Outstanding at December 31, 1998 $13.13-$27.00 35,000
=================
All options under this plan were exercisable at December 31, 1998,
1997 and 1996.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee and non-employee director stock options under
the fair value method of that SFAS.
The fair values for these options were estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1998, 1997 and 1996, respectively:
risk-free interest rates of 4.74%, 5.53% and 5.39%; volatility factors of
the expected market price of the Company's common stock of .221, .200 and
.200; and weighted-average expected life of the options of 8.0, 6.4 and 3.5
years. The Company assumed a 0% dividend yield over the expected life of
the options. The weighted-average fair values of options granted during the
years ended December 31, 1998, 1997 and 1996 were $12.88, $8.28, and $4.79,
respectively. The weighted-average remaining contract life at December 31,
1998 for all outstanding options under the Company's stock option plans is
6.95 years. The weighted average exercise price for all outstanding options
under the Company's stock option plans was $21.74 at December 31, 1998.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing model does
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
effects of applying SFAS No. 123 for pro forma disclosures are not likely
to be representative of the effects on reported net income or losses for
future years. The Company's pro forma information follows:
1998 1997 1996
------------------------------------
(In thousands, except per share data)
Pro forma net income $29,242 $22,432 $18,494
====================================
Pro forma basic net income per share $ 1.38 $ 1.07 $ 0.89
====================================
Pro forma net income per share--
assuming dilution $ 1.35 $ 1.05 $ 0.88
====================================
NOTE 12--INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted
income per common share:
Years ended December 31,
1998 1997 1996
---------------------------------
(In thousands, except per share data)
Numerator (basic and diluted):
Net income $30,772 $23,143 $18,971
=================================
Denominator:
Denominator for basic income per common share--
Weighted-average shares 21,238 21,043 20,864
Effect of employee stock options (Note 11) 364 234 168
---------------------------------
Denominator for diluted income per common share
adjusted weighted-average shares and assumed
conversions. 21,602 21,277 21,032
=================================
Basic net income per common share $ 1.45 $ 1.10 $ 0.91
=================================
Net income per common share--assuming dilution $ 1.42 $ 1.09 $ 0.90
=================================
NOTE 13--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows at December 31:
1998 1997
-----------------------------------
(In thousands)
Deferred tax assets:
Current:
Allowance for doubtful accounts $ 225 $ 138
Vacation accrual 852 567
Inventory carrying value -- 636
Other accruals 3,031 83
-----------------------------------
4,108 1,424
Noncurrent:
Property and equipment 1,843 --
Other 1,335 158
-----------------------------------
3,178 158
-----------------------------------
Total deferred tax assets 7,286 1,582
Deferred tax liabilities:
Current:
Inventory carrying value 1,270 --
-----------------------------------
1,270 --
Noncurrent:
Property and equipment -- 2,273
Other accruals -- 30
-----------------------------------
Total deferred tax liabilities 1,270
Net deferred tax assets (liabilities) $6,016 $(721)
===================================
The provision for income taxes consists of the following:
Current Deferred Total
--------------------------------------------------------------------
(In thousands)
1998:
Federal $10,386 $ 6,852 $17,238
State...... 1,156 777 1,933
--------------------------------------------------------------------
$11,542 $ 7,629 $19,171
====================================================================
1997
Federal $13,562 $ (915) $12,647
State...... 1,893 (127) 1,766
--------------------------------------------------------------------
$15,455 $(1,042) $14,413
====================================================================
1996
Federal $8,502 $ 1,316 $9,818
State...... 1,077 167 1,244
--------------------------------------------------------------------
$9,579 $ 1,483 $11,062
====================================================================
A reconciliation of the provision for income taxes to the amounts
computed at the federal statutory rate is as follows:
1998 1997 1996
-----------------------------------------
(In thousands)
Federal income taxes at statutory rate $17,480 $13,145 $10,512
State income taxes, net of federal tax benefit 1,256 1,148 809
Other items, net 435 120 (259)
-----------------------------------------
$19,171 $14,413 $11,062
=========================================
The tax benefit associated with the exercise of non-qualified stock
options has been reflected as additional paid-in capital in the
accompanying consolidated financial statements.
During the years ended December 31, 1998, 1997 and 1996, cash paid by
the Company for income taxes amounted to $16,229,000, $12,168,000 and
$9,015,000, respectively.
NOTE 14--STOCK SPLIT
On July 8, 1997, the Company's Board of Directors declared a
two-for-one stock split to be effected in the form of a 100% stock dividend
payable to all shareholders of record as of July 31, 1997. The stock
dividend was paid on August 31, 1997. Accordingly, the stock split has been
recognized by reclassifying $105,000, the par value of the additional
shares resulting from the split, from retained earnings to common stock.
All share and per share information included in the accompanying
consolidated financial statements has been restated to reflect the
retroactive effect of the stock split for all periods presented.
NOTE 15--QUARTERLY FINANCIAL DATA--UNAUDITED
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------
(In thousands, except per share data)
Year ended December 31, 1998
Product sales.................... $118,269 $165,242 $172,784 $160,007
Gross profit..................... 50,669 66,201 69,345 71,648
Operating income................. 10,602 13,745 15,435 17,119
Net income....................... 5,819 7,672 8,361 8,920
Basic net income per share....... 0.28 0.36 0.39 0.42
Net income per share--assuming dilution 0.27 0.36 0.39 0.41
Year ended December 31, 1997
Product sales.................... $68,472 $82,448 $87,517 $77,962
Gross profit..................... 29,191 34,715 36,531 34,173
Operating income................. 7,928 9,493 10,467 9,196
Net income....................... 5,007 6,082 6,621 5,433
Basic net income per share....... 0.24 0.29 0.31 0.26
Net income per share--assuming dilution 0.24 0.29 0.31 0.25
The above quarterly financial data is unaudited, but in the opinion of
management, all adjustments necessary for a fair presentation of the
selected data for these interim periods presented have been included.
NOTE 16--SUBSEQUENT EVENTS
Effective January 4, 1999, the Company entered into a Master Lease
Agreement with O'Reilly-Wooten 2000 LLC (an entity owned by certain
shareholders of the Company) related to the sale and leaseback of certain
properties. The transaction closed on January 4, 1999 with a purchase price
of approximately $5.5 million. The lease calls for an initial term of 15
years with two five-year renewal options.
In January 1999, the Company amended its syndicated credit facility.
Under the terms of the amendment, the commitment under the revolving credit
facility was increased to $160,000,000 from $125,000,000. This $35,000,000
increase terminates July 31, 1999 or upon the occurrence of a "capital
markets event" (as defined). The Company believes that the completion of
the offering discussed below will constitute a capital markets event.
Advances under this amendment bear interest at the rates provided for in
the original credit agreement.
On March 5, 1999, the Company filed a registration statement with the
Securities and Exchange Commission for a secondary offering of 3,340,000
shares of common stock, 3,000,000 of which are to be offered by the
Company. The net proceeds from this offering will be used to repay certain
of the outstanding indebtedness of the Company under its credit facility.
Report Of Independent Auditors
The Board of Directors and Shareholders
O'Reilly Automotive, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
O'Reilly Automotive, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
O'Reilly Automotive, Inc. and Subsidiaries at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Kansas City, Missouri
March 2, 1999
NUMBER OF STOCKHOLDERS
As of December 31, 1998, O'Reilly Automotive, Inc. had approximately 10,000
stockholders based on the number of holders of record and an estimate of
the number of individual participants represented by security position
listings.
MARKET PRICES AND DIVIDEND INFORMATION
The prices in the table below represent the high and low sales price for
O'Reilly Automotive, Inc. common stock as reported by the Nasdaq Stock
Market.
The common stock began trading on April 22, 1993. No cash dividends have
been declared since 1992, and the Company does not anticipate paying any
cash dividends in the foreseeable future.
1998 1997
High Low High Low
First Quarter $ 30 1/2 $ 24 5/8 $ 19 1/16 $ 15 1/2
Second Quarter 36 3/4 25 5/8 19 7/8 16 7/8
Third Quarter 39 1/2 28 5/8 26 18 7/8
Fourth Quarter 48 3/8 31 5/8 28 21
For the Year 48 3/8 24 5/8 28 15 1/2
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 21.1 - Subsidiaries of the Company
Subsidiary State of Incorporation
---------- ----------------------
Ozark Automotive Distributors, Inc. Missouri
Greene County Realty Co. Missouri
O'Reilly II Aviation, Inc. Missouri
Hi-Lo Automotive, Inc. Delaware
One hundred percent of the capital stock of each of the above listed
subsidiaries is directly owned by O'Reilly Automotive, Inc.
O'Reilly Automotive, Inc. and Subsidiaries
Exhibit 23.1 - Consent of Ernst & Young LLP, independent auditors
We consent to the incorporation by reference in this Annual Report (Form
10-K) of O'Reilly Automotive, Inc. and Subsidiaries of our report dated
March 2, 1999, included in the 1998 Annual Report to Shareholders of
O'Reilly Automotive, Inc.
Our audits also included the financial statement schedule of O'Reilly
Automotive, Inc. and Subsidiaries listed in item 14(a). This schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial
statement schedule referred to above, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3 No. 333-73377, Form S-8 No. 33-61632, Form S-8 No.
33-73892 and Form S-8 No. 33-91022) of O'Reilly Automotive, Inc. of our
report dated March 2, 1999 with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the consolidated financial statement
schedule included in this Annual Report (Form 10-K) of O'Reilly Automotive,
Inc. for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Ernst & Young LLP
Kansas City, Missouri
March 25, 1999