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, 1997
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
Missouri 44-0618012 -------------------------------------------------------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, 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 27, 1998, an aggregate of 21,149,429 shares of the common stock of the registrant were outstanding. As of that date, the aggregate market value of the voting stock held by non-affiliates of the Company was approximately $418,915,154 based on the last sale price of the common stock reported by the Nasdaq Stock Market (National Market).
DOCUMENTS INCORPORATED BY REFERENCE
As provided herein, portions of the registrant's documents specified below are incorporated herein by reference:
Document Part-Form 10-K --------------------------------------------- --------------------------- Portions of the Annual Shareholders' Report for the Year Ended December 31, 1997 Parts I, II and IV Proxy Statement for 1998 Annual Meeting of Stockholders (to be filed pursuant to Regulation 14A within 120 days of the end of registrant's most recently completed fiscal year) Part III |
The information contained in this Form 10-K includes statements regarding matters which are not historical facts (including statements as to O'Reilly Automotive, Inc.'s (the "Company") plans, beliefs or expectations) which are forward-looking statements within the meaning of the federal securities laws. Because such forward-looking statements involve certain risks and uncertainties, the Company's actual results and the timing of certain events could differ materially from those discussed herein. 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 herein by reference) and those risk factors discussed in Exhibit 99.1 hereto.
PART I
ITEM 1 BUSINESS
General
O'Reilly Automotive, Inc. ("O'Reilly" or the "Company") is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies, equipment and accessories ("Automotive Products") to both "do-it-yourself" ("DIY") customers and professional mechanics or service technicians ("Professional Installers"). The Company, which was founded in 1957 by the O'Reilly family in Springfield, Missouri, operates 259 stores (at December 31, 1997) within the states of Missouri, Arkansas, Kansas, Oklahoma, Nebraska and Iowa. See "Growth and Expansion Strategies." O'Reilly stores carry an extensive product line consisting of (i) new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, and brake shoes and pads, (ii) maintenance items, such as oil, antifreeze, fluids, engine additives and appearance products, (iii) accessories, such as floor mats and seat covers, and (iv) a complete line of auto body paint and related materials, automotive tools and professional service equipment. The Company offers machining services through its O'Reilly stores, but does not sell tires or perform automotive repairs or installations. Approximately 97% of the Company's 1997 product sales were generated through the O'Reilly store network, of which approximately one-half was derived from DIY customers and one-half from Professional Installers. The remaining 3% of the Company's product sales was generated by its wholly-owned subsidiary, Ozark Automotive Distributors, Inc. ("Ozark"), through wholesale sales to independently owned auto parts stores.
Background
O'Reilly was founded in 1957 by Charles F. O'Reilly and his son, Charles H. "Chub" O'Reilly, Sr. (a current director of the Company) and initially operated from a single store in Springfield, Missouri, with 12 employees selling primarily to the Professional Installer portion of the market. O'Reilly established Ozark in October 1960 to purchase Automotive Products directly from the manufacturer and to distribute such Automotive Products to O'Reilly.
The Company has experienced steady growth from its first year of operation. By 1980, each of Chub O'Reilly's children, Charles, Lawrence and David O'Reilly and Rosalie O'Reilly Wooten, had assumed leadership roles in the Company. Together with their father, they have managed the Company through a period of rapid growth and profitability.
The Company's goal is to continue its pattern of growth in sales and profitability by capitalizing on its role as a leading specialty retailer and supplier of Automotive Products throughout its markets. The key elements of the multifaceted business strategy developed by the Company to achieve this goal are discussed below.
Operating Strategies
Dual Market Strategy. The Company believes that because it aggressively pursues both the DIY and the Professional Installer portions of the automotive aftermarket through its O'Reilly store network, the Company can successfully compete not only in large metropolitan markets but also in less densely populated areas. In 1997, the Company derived approximately one-half of its O'Reilly store network sales by selling to the DIY market and approximately one-half of such sales by selling to the Professional Installer market. By serving both portions of the market, the Company believes that it is able to reach substantially all consumers Automotive Products within its market areas. The increased demand generated by this expanded customer base permits the Company to (i) stock
(either in-store or at its distribution centers) a broader selection of stock-keeping units ("SKU's"), and (ii) restock and fill special orders from its distribution centers on an overnight, or in some cases, a same-day basis. See "Inventory Management and Distribution Systems."
The Company also believes that its service to both the DIY and Professional Installer portions of the automotive aftermarket results in additional benefits not generally enjoyed by competitors serving only one portion of the market. Because the Company deals with the more technically-oriented Professional Installers, the Company's Professional Parts People are required to be more technically proficient, particularly with regard to hard parts. The Company has found that such technical proficiency is also valued by its DIY consumers, thereby enhancing the Company's ability to execute its customer service strategy. Further, the Company has found that the more progressive marketing concepts utilized in the DIY portion of its business can be applied to increase sales of Automotive Products to the Company's Professional Installer customers.
Inventory Management and Distribution Systems. The Company's inventory management and distribution systems, which electronically link each O'Reilly store to a distribution center, provide an efficient and sophisticated means of inventory control and management. The computer system at each O'Reilly store records each sale, makes a corresponding inventory adjustment and orders replacement inventory from the distribution center. The Company utilizes an industry ranking method, in addition to its own evaluation criteria, for each SKU carried at the distribution center which identifies and classifies each SKU by demand. Refinements to inventory levels to be carried in the stores are made continuously based in large part on the sales movement shown by the Company's computerized inventory control system and on management's assessment of the changes and trends in the marketplace. Under arrangements with most suppliers of Automotive Products, slow moving or obsolete merchandise is returned to the supplier for full credit. Accordingly, the Company experiences little obsolescence in its inventory.
The Company's distribution centers are equipped with highly automated conveyor systems which expedite the movement of Automotive Products to loading areas for shipment to individual stores on a nightly basis. The distribution centers utilize computer assisted technology to electronically receive orders from computers located in each O'Reilly store. The Company, which continually seeks to further enhance these systems, has installed a bar code system in its stores. In addition, the Company has established a satellite-based data interchange system between those O'Reilly stores in which high-speed data transmission technology is not readily available, the distribution center which services such stores and the O'Reilly corporate headquarters.
During 1997, the Company's three distribution centers experienced an annual inventory turn of approximately 5.3 times, and the O'Reilly store network had an average inventory turn of approximately 3.7 times. The Company believes that its warehouse distribution system enables it to maintain optimum inventory levels throughout the O'Reilly store network and, at the same time, provide its customers with an outstanding selection of SKU's at each O'Reilly store site. The Company further believes that its ability to provide its customers with access to over 105,000 SKU's (many of which are lower turnover items not typically stocked at other parts stores) on an overnight and, in some cases, a same day basis results in an important competitive advantage enjoyed by the Company in this key area of SKU selection and availability.
Superior Customer Service. The Company's number one priority is customer satisfaction. The Company seeks to attract new DIY and Professional Installer customers and to retain existing customers by conducting a variety of advertising and promotional programs and by offering (i) superior in-store service through highly-motivated, technically-proficient Professional Parts People using advanced point-of-sale systems, (ii) an extensive selection of SKU's stocked in each store, (iii) same day or overnight availability of over 105,000 SKU's made possible through the Company's rapid, on-line communication with its distribution centers, (iv) attractive stores in convenient locations, and (v) competitive pricing supported by the Company's Right Part, Right Price, Right Now(R) policy.
Each of O'Reilly's Professional Parts People is required to be technically proficient in the workings and application of Automotive Products. See "Store Operations--Store Personnel and Training." This degree of technical proficiency is essential because of the significant portion of the Company's business represented by the Professional Installer. The Company has found that the typical DIY customer often seeks assistance from sales persons, particularly in connection with the purchase of hard parts. The Company believes that the ability of its Professional Parts People to provide such assistance to the DIY consumer is valued by the DIY customer, and therefore is likely to result in repeat DIY business. To assist the Company's Professional Parts People in providing superior customer service, the Company has installed advanced point-of-sale information systems. These systems provide individual O'Reilly stores with access to the Company's database of manufacturer recommended parts (the "electronic catalog") and the ability to locate parts at other O'Reilly stores. These systems also significantly shorten the time period required to obtain credit card and personal check approvals.
The Company believes that the satisfaction of DIY and Professional Installer customers often is substantially dependent upon the Company's ability to offer the specific Automotive Product requested. Accordingly, each O'Reilly store carries a broad selection of Automotive Products designed to cover a broad range of vehicle specifications. To emphasize its commitment to providing its customers with the Automotive Products requested, the Company has instituted a Right Part, Right Price, Right Now(R) policy. Under this policy, if any of the 15,000 most commonly requested Automotive Products is not available in-store when the customer requests it, the Company will apply a 5% discount to the purchase price of the item and the part will usually be available within 24 hours from one of the Company's distribution centers.
The Company believes that O'Reilly stores are "destination stores" generating their own traffic rather than relying on traffic created by the presence of other stores in the immediate vicinity. Consequently, most O'Reilly stores are free-standing buildings situated on or near major traffic thoroughfares. O'Reilly stores offer ample parking and easy customer access.
The Company believes that a competitive pricing policy is essential within product categories in order to compete successfully. Product pricing is generally established to meet the pricing policies of competitors in the market area served by each store. Most Automotive Products sold by the Company are priced at discounts from the manufacturer suggested prices and additional savings are offered through volume discounts and special promotional pricing. Consistent with its Right Part, Right Price, Right Now(R) policy, each O'Reilly store will match any verifiable price on any in-stock product of the same or comparable quality offered by any of its competitors.
Growth and Expansion Strategies
Accelerated New Store Openings. The Company's ability to open new stores in both existing and new markets since the beginning of 1980 has been a significant factor in achieving its rapid growth in product sales and profitability. At December 31, 1997, the Company operated 259 stores within the states of Missouri, Arkansas, Kansas, Oklahoma, Nebraska and Iowa. For the five years ended December 31, 1997, the Company has increased the number of stores at an average annual rate of approximately 15%. Aside from the substantial growth resulting from the Hi-Lo Automotive, Inc. merger (see below) in January 1998, the Company has adopted certain strategic initiatives designed to accelerate its new store opening rate to approximately 16% by 1998. The Company intends to open 50 new stores in 1998 and 80 new stores in 1999, including stores to be opened in the new market areas of Texas, Iowa and Nebraska, and additional stores in the Company's current market areas. Management believes that the Company's ability to open new stores at this accelerated rate will continue to be a significant factor in achieving its growth objectives for the future, and that substantial opportunities exist for the opening of new stores to achieve greater penetration in existing markets and to expand into new contiguous markets.
On January 30, 1998, the Company completed a merger with Hi-Lo Automotive,
Inc. and its subsidiaries ("Hi/LO") by acquiring 100% of the outstanding capital
stock. Hi/LO is a specialty retailer and supplier of Automotive Products
headquartered in Houston, Texas. Hi/LO is now a wholly-owned subsidiary of the
Company, with 189 stores located in Texas (165), Louisiana (17) and California
(7), and a 375,000 square foot distribution center located in Houston. Excluding
California and its seven stores, the Hi/LO operations are contiguous to
O'Reilly's existing operations, thereby creating a natural geographic extension
for the Company into market areas already slated for future growth and
development. The equity purchase price was approximately $47.8 million, or $4.35
per common share. Additionally, approximately $43.2 million of debt was assumed
for a total purchase price of $91 million.
In order to support O'Reilly's acquisition of Hi/LO, and continued working capital and general corporate needs, the Company replaced its lines of credit in January 1998 with new, unsecured, syndicated credit facilities totaling $175 million. The facilities are comprised of a $125 million five-year revolving credit facility which includes a $5 million sublimit for the issuance of letters of credit and a $50 million five-year term loan facility. These new credit facilities are guaranteed by the subsidiaries of the Company and the acquired Hi/LO subsidiaries. The Company is required to meet various financial covenants as detailed in the credit agreement.
During 1998, the Company will convert the Hi/LO stores and distribution center to the corresponding O'Reilly systems, strategies and policies. Other than the description of the merger transaction as outlined above and as discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations (see Exhibit 13.1) of the Company, the results of operations of Hi/LO and other related information are not included in this report.
Until 1986, the Company's expansion was targeted to markets with
populations of less than 100,000. The Company 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 40
(net) stores opened in 1997, 10 are located in Nebraska, 10 in Oklahoma, 8 in
Kansas, 7 in Iowa and the remainder are located in Missouri and Arkansas. While
the Company has faced, and expects to continue to face, more aggressive
competition in its more densely populated markets, the Company believes that it
has competed effectively, and that it is well positioned to continue to compete
effectively, in such markets and achieve its goal of continued sales and profit
growth within these markets. The Company also believes that because of its Dual
Market Strategy, the Company is better able to operate stores in less densely
populated areas within its regional market which would not otherwise support a
national or regional chain store selling to one portion of the market or the
other. Consequently, the Company expects to continue to open new stores in less
densely populated market areas.
To date, the Company has 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. New stores are typically opened by the Company either (i) by constructing a new store at a site which is purchased or leased and stocking the new store with fixtures and inventory, or (ii) by acquiring an independently owned parts store, typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store. The costs associated with the opening of a new O'Reilly store (including the cost of land acquisition, improvements, fixtures, inventory and computer equipment) are estimated to average approximately $900,000-$1,100,000; however, such costs may be significantly reduced where the Company leases, rather than purchases, the store site. Although the cost to acquire the business of an independently owned parts store varies, depending primarily upon the amount of inventory and the amount, if any, of real estate being acquired, the Company estimates that the average cost to acquire such a business and convert it to an O'Reilly store is approximately $350,000. Store sites are strategically located in clusters within geographic areas which complement the Company's distribution system in order to achieve economies of scale in management, advertising, and distribution costs. Other key factors considered by the Company in the site selection process include population density and growth patterns, age and per capita income, vehicle traffic counts, the number and type of existing automotive repair facilities, auto parts stores, and other competitors within a pre-determined radius, and the operational strength of such competitors. When entering new, more densely populated markets, the Company generally seeks to initially open several stores within a short span of time in order to maximize the effect of initial promotional programs and achieve further economies of scale.
Same store growth through increased sales and profitability is also an important part of the Company's growth strategy. To achieve improved sales and profitability at existing O'Reilly stores, the Company continually strives to improve upon the service provided to its customers. The Company believes 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.
Store Design and Location. The Company's current prototype store design, completed in 1994, features several enhancements designed to increase product sales, customer service and operating efficiencies, which generally includes greater square footage, higher ceilings, new fixtures, more convenient interior store layouts, brighter lighting, increased parking availability and dedicated counters to serve Professional Installers. The Company aggressively manages its store network through systematic renovation and relocation of existing O'Reilly stores which conform with the Company's prototype store design. In 1997, the Company renovated or relocated 28 stores.
Expansion of Distribution System. In order to facilitate its store expansion strategy, the Company utilizes a central warehouse distribution system to distribute Automotive Products to its O'Reilly store network. The Company, through its Ozark subsidiary, currently operates a 212,000 square foot warehouse distribution center (including 51,000 square feet of mezzanine space) located in Springfield, Missouri, a 113,000 square foot warehouse distribution center (including 36,000 square feet of mezzanine space) located in Kansas City, Missouri and a 123,000 square foot distribution center (including 33,000 square feet of mezzanine space) located in Oklahoma City, Oklahoma, for receiving, storing and distributing Automotive Products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations. In January 1998, a 375,000 square foot warehouse distribution center was added in Houston, Texas as a result of the Hi/LO merger. By the end of 1998, the Company expects the construction of the 160,000 square foot warehouse distribution center in Des Moines, Iowa to be completed. The Company also operates a 36,000 square foot bulk merchandise warehouse in Springfield, Missouri for the distribution of bulk products such as motor oil, antifreeze, batteries, lubricants and other fast moving bulk products. The bulk warehouse facility is located adjacent to the main distribution center in Springfield. The Company believes that its
distribution system results in lower inventory carrying costs, improved in-stock positions at the O'Reilly stores, and superior inventory control and management. Moreover, the Company believes that its expanding network of distribution centers allows it to efficiently service existing O'Reilly stores, as well as new stores planned for opening in contiguous market areas. The Company's distribution center expansion strategy also complements its new store opening strategy by supporting newly established clusters of stores located in the regions surrounding each distribution center.
Store Operations
Store Layout. Although the Company has no present intention to open new
Level 2 Stores, the O'Reilly store network is composed generally of three store
formats consisting of the Level 2 Store, the Level 1 Store and the Master
Inventory Store which, as of December 31, 1997, are categorized based on the
number of in-stock SKU's as follows:
Approximate Number of Range of Number of Store Format Stores Square Footage In-Stock SKUs --------------------------- ------ ----------------- --------------- Level 2 Stores 28 3,000 - 5,000 12,000 - 16,000 Level 1 Stores (prototype) 198 4,000 - 8,000 16,001 - 25,000 Master Inventory Stores 33 6,000 - 12,000 25,001 - 44,000 --------- 259 ========= |
The primary function of the Master Inventory Stores, like all other O'Reilly stores, is to sell Automotive Products to both portions of the marketplace. However, because Master Inventory Stores carry a greater selection of SKU's, including certain lower turnover hard parts not typically carried in the Level 1 or Level 2 Stores, a Master Inventory Store also provides the other O'Reilly stores within its area with access to a greater selection of SKU's on a same-day basis.
O'Reilly stores offer the DIY and the Professional Installer customer a wide selection of nationally recognized brand name and private label SKU's for domestic and imported automobiles, vans and trucks. New and remanufactured automotive hard parts, such as engine and transmission parts, alternators, starters, water pumps, and brake shoes and pads, have accounted for a majority of total sales. An O'Reilly store also carries an extensive selection of maintenance items, such as oil, antifreeze, fluids, engine additives, appearance products, and accessories, such as floor mats and seat covers, and a complete line of auto body paint and related materials, automotive tools and professional service equipment. Maintenance items and accessories have accounted for most of the remaining sales. The Company operates machine shops in 9 regional locations, 7 of which are located at an O'Reilly store. There are two free-standing machine shops, one located in Springfield, Missouri, and the other in Tulsa, Oklahoma. The O'Reilly machine shops perform engine machining services (such as block boring, head resurfacing, and crankshaft grinding) for DIY and Professional Installer consumers of such services. The Company believes that its performance of this service is valuable not only in maintaining its relationships with its DIY and Professional Installer customers but in attracting new customers, in each case resulting in increased sales of Automotive Products. Each O'Reilly machine shop is equipped with sophisticated equipment, and employs ASE certified machinists having an average of approximately ten years experience in machining.
Store exteriors generally feature a light tan facade highlighted by an attractive red, white and green stripe, with the name O'Reilly Auto Parts written in Kelly green letters on a white background in a lighted sign. During 1994, a friendlier and more modern store format with an open architectural style was introduced. These new stores feature greater square footage, higher ceilings, brighter lighting, taller fixtures and a more attractive interior design. The Company utilizes a computer-assisted "plan-o-grammed" store layout system to provide uniform and consistent merchandise presentation; however some variation occurs in order to meet the specific needs of a particular market area. Merchandise is arranged to provide easy customer access and maximum selling space, keeping high-turnover products and accessories within view of the customer, and aisle displays are generally used to feature high-demand or seasonal merchandise, new items and advertised specials. All stores have a counter adjacent to the front display area where automotive replacement hard parts that do not lend themselves to display are available. Although store hours may vary by market area, O'Reilly stores are generally open Monday through Friday, 8:00 a.m. to 9:00 p.m., Saturday, 8:00 a.m. to 8:00 p.m. and Sunday, 9:00 a.m. to 6:00 p.m. O'Reilly stores accept cash, checks and major credit cards and extend short-term credit to those Professional Installers who satisfy the Company's credit requirements.
Store Automation. To enhance store level operations and customer service, the Company has installed advanced point-of-sale computer terminals which are generally located on the hard parts counters. These point-of-sale terminals are linked with the IBM AS/400 computers located in each of the Company's distribution centers and utilize bar code scanning technology to price merchandise in sales transactions. In addition, the point-of-sale terminals provide immediate access to the Company's electronic catalog to display parts and pricing information by make, model and year of vehicle. This system speeds transaction times, reduces register lines and provides enhanced customer service. Moreover, this system captures sales information which assists in store management, strategic planning, inventory control and distribution effectiveness.
Store Personnel and Training. The Company believes that technical proficiency on the part of each sales specialist is essential to meet the needs of its customers, particularly the Professional Installer, and that the technical proficiency of its Professional Parts People resulting from O'Reilly's extensive and ongoing training program provides the Company with a significant advantage over its competitors, particularly the smaller retail operators and the less specialized mass merchandisers.
The Company's training function is managed by a full time vice-president of marketing and training who, together with his staff, is headquartered in Springfield, Missouri. There currently are regional trainers located in Springfield, Missouri, Kansas City, Missouri and Oklahoma City, Oklahoma. The Company screens prospective employees to identify highly-motivated individuals with either experience in automotive parts or repairs, or an aptitude for automotive knowledge. Each person who becomes an employee, or "team member," first participates in an intensive two-day orientation program designed to introduce the team member to the Company culture and specific job duties before being assigned specific job responsibilities. The successful completion of additional training is required before a team member is deemed qualified as a parts specialist and thus able to work at the parts counter at an O'Reilly store. 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 ASE certification. As of December 31, 1997, approximately 500 parts specialists were ASE certified.
In addition to extensive on-the-job training under the supervision of the store manager or assistant store manager, each team member completes a weekly training assignment and has available to him or her a number of training programs (videos, booklets, etc.) presented by the Company under the direction of the training director. For example, team members are given notice of and encouraged to attend seminars designed by the Company primarily for its Professional Installer customers. The seminars are generally conducted by the Company's technical trainer or by representatives of a manufacturer or supplier, and focus primarily on advanced automotive systems and parts knowledge.
Each O'Reilly store participates in the Company's sales specialist training program that is conducted by the operations training manager. 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.
Management training is also an important part of the Company's training program. Each O'Reilly store is staffed with a store manager and an assistant manager, in addition to the counter sales persons and support staff required to meet the specific needs of each store. There are currently 31 district managers, each of whom has general supervisory responsibility for an average of eight O'Reilly stores within such manager's district. Each district manager receives comprehensive training on a monthly basis at the Company's headquarters focusing on management techniques, new product announcements, advanced automotive systems and Company policies and procedures. In turn, the information covered at such monthly meetings is discussed in full by district managers at monthly meetings with their store managers. All assistant managers and manager trainees are required to successfully complete a six-month manager development program, which includes 85 hours of classroom and field training, as a prerequisite to becoming a store manager. This program covers operations extensively, as well as principles of successful management.
The Company provides financial incentives to its district managers, store managers, assistant managers and sales specialists through an incentive compensation program. Under the Company's incentive compensation program, the base salary of most team members engaged in the sale of Automotive Products, particularly district managers and store managers, is augmented by incentive compensation which is based upon the achievement of sales and profitability goals. Such sales and profitability goals are based upon the performance of an individual store or district in which the team member performs services. The Company believes that its incentive compensation program significantly increases the motivation and overall performance of its Professional Parts People and
the Company's ability to attract and retain qualified management and other personnel. Most of the Company's current senior management, district managers and store managers were promoted to their positions from within the Company. Most members of senior management have at least 20 years experience with the Company, and district managers and store managers have an average length of service with the Company of approximately eight years and six years, respectively.
Marketing and Products
Marketing to the Professional Installer. Throughout its history, the Company has been a seller of Automotive Products to the Professional Installer. The Company considers this portion of its business to be an integral part of its entire business strategy and devotes substantial time and energy to the development of its Professional Installer business. The Company's Director of Sales is primarily responsible for the development and maintenance of the Company's Professional Installer business. There are 40 full time O'Reilly sales representatives strategically located in the more densely populated market areas served by the Company dedicated solely to calling upon and selling to the Professional Installer. Moreover, each district manager and store manager participates in these activities by calling upon existing and potential new Professional Installers on a regular and periodic basis. Most of the O'Reilly stores operate one or more small trucks or vans in order to provide prompt delivery service to the Professional Installer. In addition, many O'Reilly stores provide a dedicated counter to serve Professional Installers. In order to promote the Professional Installer portion of its business, the Company provides various services of special interest to the Professional Installer. For example, the Company provides trade credit for qualified Professional Installers and sponsors seminars concerning topics of interest to Professional Installers, such as technical updates, safety and general business management.
Marketing to the Independently Owned Parts Store. Along with the operation of the distribution centers and the distribution of Automotive Products to the O'Reilly stores, Ozark also sells Automotive Products to independently owned parts stores whose retail stores are generally located in areas not serviced by an O'Reilly store. The Company generally does not compete with any independently owned parts store to which it sells Automotive Products, but has, on occasion, acquired the business assets of an independently owned parts store supplied by Ozark. Ozark operates its own separate marketing program to independently owned parts stores through a staff of five. Of the approximately 60 independently owned parts stores currently purchasing Automotive Products from Ozark, 55 participate in the Auto Value(R) program through Ozark. As a participant in this program, an independently owned parts store which meets certain minimum financial and operational standards is permitted to indicate its Auto Value(R) membership through the display of the Auto Value(R) logo, which is owned by Auto Value Associates, Inc. ("Auto Value Associates"), a non-profit buying group consisting of 43 members as of December 31, 1997, including the Company, engaged in the distribution or sale of Automotive Products. Additionally, the Company provides advertising and promotional assistance to Auto Value(R) stores purchasing Automotive Products from Ozark, as well as marketing and sales support. In return for a commitment to purchase Automotive Products from Ozark, the Company offers assistance to an Auto Value(R) independently owned parts store by providing loan guarantees and financing secured by inventory, furniture and fixtures, making available computer software for inventory control and performing certain accounting and bookkeeping functions.
Pricing. The Company believes that a competitive pricing strategy is essential within all product categories in order to compete successfully. The Company's pricing is established by senior management, with input from store management, in a manner designed to meet product prices charged by the Company's competitors in the market. To assure competitive pricing, the Company has established its Low Price Guarantee(R) policy under which each O'Reilly store, at the request of a customer, will match any verifiable price on any in-stock product of the same or comparable quality. Most Automotive Products sold by the Company are priced at discounts from the manufacturer's suggested prices and additional savings are offered through volume discounts. Special promotions are also offered to attract customers, particularly the DIY customer, to the O'Reilly stores, which special promotions are often times supported through newspaper and electronic advertising and through the use of special flyers.
Advertising and Promotion. The Company aggressively promotes sales to consumers through an extensive advertising program which includes direct mail, newspaper and radio and television advertising in selected markets. The Company believes that its advertising and promotional activities have resulted in significant name recognition in each of its market areas. Newspaper and radio advertisements are generally directed towards specific product and price promotions, frequently in connection with specific sale events and promotions. Total advertising expenses (excluding amounts received from suppliers as allowances), have decreased from approximately 1.2% in 1996 to approximately 1.1% of product sales in 1997.
Products and Purchasing. Aided by the Company's computerized inventory control and management system, the product selection and purchasing functions are managed centrally at the Company's executive offices. The Company's merchandise generally consists of nationally recognized, well advertised, name brand products such as A.C. Delco, Moog, Wagner, Gates Rubber, Federal Mogul, Monroe, Prestone, Quaker State, Pennzoil, Castrol, Valvoline, STP, Armor All and Turtle Wax. In addition to name brand products, O'Reilly stores carry a wide variety of high-quality private label products under its O'Reilly Auto Parts(R), SuperStart(R), BrakeBest(R), Ultima(R) and Omnispark(R) proprietary name brands, and the Parts Master(R) name brand (which are provided through Auto Value Associates). Because most of such products are produced by nationally recognized manufacturers in accordance with the Company's specifications, the Company believes that the private label products are of equal or, in some cases, better quality than comparable name brand products, a characteristic which is important to the Company's Professional Installer clientele. The Company further believes that the private label products are packaged attractively to promote customer interest and are generally priced below comparable name brand products carried in the store.
Although the Company is not obligated to make purchases through Auto Value Associates, Auto Value Associates assists the Company in negotiating purchases of Automotive Products from a variety of vendors (including purchases of Parts Master(R) products). Because of its volume purchases of Automotive Products, the Company believes that its long-term ability to buy Automotive Products on favorable terms would not be materially adversely affected if the Company ceased to be a member of Auto Value Associates. The Company believes, however, that its membership in Auto Value Associates provides certain benefits, and does not currently intend to terminate its membership therein.
The Company purchases Automotive Products from approximately 400 vendors, the three largest of which accounted for approximately 13% of the Company's total purchases in fiscal 1997 and none of which accounted for more than 5% of such purchases. The Company has no long-term contractual purchase commitments with any of its vendors. The Company has not experienced difficulty in obtaining satisfactory alternative sources of supply for Automotive Parts, and believes that adequate sources of supply exist at substantially similar costs, for substantially all Automotive Products sold by the Company. The Company considers its relationships with its suppliers to be good. Manufacturers of Automotive Products, particularly hard parts, typically provide repair and replacement warranties which are passed on by the Company to its customers. However, the Company does provide warranties on a few product lines. The Company's Automotive Product vendors generally permit the Company to return any slow moving or obsolete inventory for a full credit. It is the Company's policy to take advantage of early payment and seasonal purchasing discounts offered by its vendors, and to utilize extended dating terms available from vendors due to volume purchasing.
Competition
The Company believes that while the industry is still highly fragmented, the ability of national and regional specialty retail chains, such as the Company, to operate more efficiently than the smaller independent operator or mass merchandiser will result in industry consolidation. The Company believes that automotive specialty chains are able to operate more efficiently than small or less specialized competitors because of economies of scale and internal efficiencies, particularly in the areas of purchasing, distribution, inventory management and advertising. The Company also believes that staffing sales positions with technically proficient sales personnel is essential to meet the needs of purchasers of today's more sophisticated and complex automotive parts and that such staffing differentiates the specialty retailer from the less specialized mass merchandiser. The Company believes that specialty retail chains, such as the Company, which have the financial resources to provide for such internal efficiencies and the ongoing training required to ensure the staffing of technically proficient sales personnel, are well positioned to gain market share from the smaller independent operators and mass merchandisers.
The Company competes in both the DIY and Professional Installer portions of the automotive aftermarket business. Competitors in the DIY portion of its business within its current market areas (primarily in the more densely populated market areas) include automotive parts chains such as AutoZone, Parts America (formerly known as Western Auto) and Pep Boys, independently owned parts stores (some of which are associated with national auto parts distributors or associations), automobile dealerships and mass or general merchandise, discount and convenience chains that carry Automotive Products. The Company's major competitors in the Professional Installer portion of its business include independent warehouse distributors and independently owned parts stores, automobile dealers and national warehouse distributors and associations, such as National Automotive Parts Association (NAPA), Carquest and Parts Plus. AutoZone entered into certain of the Company's Professional Installer markets in 1997. The Company competes on the basis of customer service, merchandise selection and availability, price, and store location. The Company believes that its principal
strengths are its ability to provide both the DIY and Professional Installers same day or overnight availability to more than 105,000 SKU's through its highly motivated and technically proficient Professional Parts People. However, some of the Company's current and potential competitors are larger than the Company and have greater financial resources than the Company.
Employees
As of December 31, 1997, the Company had 3,945 team members, of whom 2,973 were employed at the O'Reilly stores, 595 were employed at the distribution centers and 377 were employed at the corporate and administrative headquarters. The Company's team members are not subject to a collective bargaining agreement. The Company considers its relations with its team members to be excellent, and strives to promote good employee relations through various programs designed for such purposes.
Servicemarks and Trademarks
The Company has registered the servicemarks O'Reilly Automotive(R), O'Reilly Auto Parts(R), Right Part, Right Price, Right Now(R), Because It's Your Car We're Talking About(R) and Parts Payoff(R) and the trademarks SuperStart(R), BrakeBest(R), Ultima(R) and Omnispark(R). Further, the Company is licensed to use the registered trademarks and servicemarks Auto Value(R) and Parts Master(R) in connection with its marketing program, which marks are owned by Auto Value Associates. The Company believes that its business is not otherwise dependent upon any patent, trademark, servicemark or copyright.
Regulation
Although subject to various laws and governmental regulations relating to its business, including those related to the environment, the Company does not believe that compliance with such laws and regulations has a material adverse effect on its operations. Further, the Company is unaware of any failure to comply with any such laws and regulations which could have a material adverse effect on its operations. No assurance can be given, however, that significant expenses could not be incurred by the Company to comply with any such law or regulation in the future.
The following table provides certain information with respect to the Company's headquarters and distribution centers as of December 31, 1997:
Square Location Principal Use(s) Footage Interest --------------- ------------------------------- ---------- -------- Springfield, MO Executive and Administrative Offices and Distribution Center 256,000(a)(b) Owned Springfield, MO Administrative Offices, Training and Research 35,000 Leased(c) Springfield, MO Bulk Merchandise Warehouse 36,000 Owned Kansas City, MO Distribution Center 113,000(a) Owned Oklahoma City, OK Distribution Center 123,000(a) Owned ----------------------- |
(a) Includes mezzanine space.
(b) Includes 212,000 square feet (including mezzanine space) utilized by the Company for its distribution center.
(c) Occupied under the terms of a lease expiring in 2014 with an unaffiliated party, subject to renewal for a term of 10 years at the option of the Company. To facilitate construction, the Company loaned to the owner of the facility an aggregate of approximately $2.5 million. The principal balance of such loan bears interest at a rate of six percent per annum, is payable in equal monthly installments through January 2005 and is secured by a first deed of trust.
Of the 259 stores operated by the Company at December 31, 1997, 131 stores were owned, 69 stores were leased from unaffiliated parties and 59 stores were leased from one of two real estate investment partnerships formed by the O'Reilly family. Leases with unaffiliated parties generally provide for payment of a fixed base rent, payment of certain tax, insurance and maintenance expense, and an original term of ten years, subject to one or more renewals at the option of the Company. The original terms of 15 stores leased from unaffiliated parties expire prior to the end of 1998. The Company has 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 expire on December 31, 1998, subject to renewal at the option of the Company for an additional period of up to six years.
The Company believes that its present facilities are in good condition, are adequately insured and together with those under construction, are suitable and adequate for the conduct of its current operations.
The Company is not a party to any legal proceedings, other than routine claims and lawsuits arising in the ordinary course of its business. The Company does not believe that such claims and lawsuits, individually or in the aggregate, will have a material adverse effect on the Company's business.
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 1997.
The following paragraphs set forth certain information with respect to the executive officers of the Company, who are not also directors:
Ted F. Wise, age 47, Executive Vice-President, has served in this capacity since March 1993. Mr. Wise had served as Vice President-Operations of the Company from June, 1984 until being elected to his current position.
James R. Batten, CPA, age 35, Vice-President of Finance/Chief Financial Officer, has served in this capacity since October 1997. From March 1994 until promotion to his current position, Mr. Batten served as Chief Financial Officer of the Company and previously held the position of Finance Manager of the Company from January 1993 until March 1994. From September 1986 until joining the Company in January 1993, Mr. Batten was employed by the accounting firm of Whitlock, Selim & Keehn where he attained the position of Audit Manager in 1991.
Christopher T. Stange, CPA, age 30, is the Director of Accounting since October 1997, in addition to holding the position of Corporate Controller since September 1996. He previously held the position of Accounting Supervisor. Mr. Stange joined the Company in 1994 as the Investor Relations Coordinator and was previously employed by Deloitte & Touche, LLP in St. Louis Missouri.
PART II
The material contained in the registrant's annual report to its shareholders (the "Annual Shareholders' Report") under the captions "Market Prices and Dividend Information" and "Number of Stockholders" included on page 28, is incorporated herein by this reference.
None.
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 17 through 27, are incorporated herein by this reference.
None.
PART III
The information regarding the directors of the Company contained in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders ("the Proxy Statement") under the caption "Election of Directors" is incorporated herein 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 herein by this reference.
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 herein by this reference.
The material in the Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners" is incorporated herein by this reference.
The material in the Proxy Statement under the caption "Transactions with Insiders and Others" is incorporated herein by this reference.
PART IV
(a) 1. Financial Statements-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statements of O'Reilly Automotive, Inc. and Subsidiaries included in the Annual Shareholders' Report of the registrant for the year ended December 31, 1997, are incorporated herein by this reference in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements for the years ended December 31, 1997, 1996 and 1995
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 are identified in the Exhibit Index on Page E-1.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last quarter of the year ended December 31, 1997.
(c) Exhibits
See Exhibit Index on page E-1.
(d) Financial Statement Schedules
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
---------------------------------- -------------------- --------------------------------------- ------------------- ---------------- Col. A Col. B Col. C Col. D Col. E ---------------------------------- -------------------- --------------------------------------- ------------------- ---------------- Additions - Description Balance at Additions - Charged to Other Deductions - Balance at End Beginning of Period Charged to Costs Accounts - Describe of Period and Expenses Describe ---------------------------------- -------------------- ------------------- ------------------- ------------------- ---------------- Year Ended December 31, 1997: Deducted from asset account: Allowance for doubtful $444 $662 $0 $743 (1) $363 accounts Year Ended December 31, 1996: Deducted from asset account: Allowance for doubtful $386 $592 $0 $534 (1) $444 accounts Year Ended December 31, 1995: Deducted from asset account: Allowance for doubtful $293 $467 $0 $374 (1) $386 accounts |
(1) Uncollectible accounts written off.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
O'REILLY AUTOMOTIVE, INC.
(Registrant)
Date: March 31, 1998 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 March 31, 1998 --------------------------- Chief Executive Officer David E. O'Reilly (principal executive officer) /s/James R. Batten Vice-President of Finance/ March 31, 1998 --------------------------- Chief Financial Officer James R. Batten (principle financial officer) /s/Lawrence P. O'Reilly Director, President and March 31, 1998 --------------------------- Chief Operating Officer Lawrence P. O'Reilly /s/Charles H. O'Reilly, Jr. Director and Chairman March 31, 1998 --------------------------- of the Board Charles H. O'Reilly, Jr. /s/Rosalie O'Reilly Wooten Director and Executive March 31, 1998 --------------------------- Vice-President Rosalie O'Reilly Wooten /s/Charles H. O'Reilly, Sr. Director and Chairman Emeritus March 31, 1998 --------------------------- Charles H. O'Reilly, Sr. /s/Jay D. Burchfield Director March 31, 1998 --------------------------- Jay D. Burchfield /s/Joe C. Greene Director March 31, 1998 --------------------------- Joe C. Greene /s/Chris T. Stange Director of Accounting/ March 31, 1998 ---------------------------- Controller Chris T. Stange (principal accounting officer) |
EXHIBIT INDEX
Exhibit No. Description ------- --------------------------------------------------------------------- 2.1* Plan of Reorganization Among the Registrant, Greene County Realty Co. ("Greene County Realty") and Certain Shareholders. 2.2 Agreement and Plan of Merger, dated as of December 23, 1997, by and among O'Reilly Automotive, Inc., Shamrock Acquisition, Inc. and Hi-Lo Automotive, Inc., filed as Exhibit (c)(1) to the Registrants' Tender Offer Statement on Schedule 14D-1 dated December 23, 1997. 3.1* Restated Articles of Incorporation of the Registrant. 3.2* Amended and Restated Bylaws of the Registrant. 4.1* Form of Stock Certificate for Common Stock. 10.1* Form of Employment Agreement between the Registrant and David E. O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr. and Rosalie O'Reilly Wooten. 10.2* Lease between the Registrant and O'Reilly Investment Company. 10.3* Lease between the Registrant and O'Reilly Real Estate Company. 10.4 Form of Retirement Agreement between the Registrant and David E. O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr. and Rosalie O'Reilly Wooten, filed herewith. 10.7(a) O'Reilly Automotive, Inc. Profit Sharing and Savings Plan, filed as Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, File No. 33-73892, and incorporated herein by this reference. 10.8*(a) O'Reilly Automotive, Inc. 1993 Stock Option Plan. 10.9*(a) O'Reilly Automotive, Inc. Stock Purchase Plan. 10.10*(a) O'Reilly Automotive, Inc. Director Stock Option Plan. 10.11* Commercial and Industrial Real Estate Sale Contract between Westinghouse Electric Corporation and Registrant. 10.12* Form of Assignment, Assumption and Indemnification Agreement between Greene County Realty and Shamrock Properties, Inc. |
EXHIBIT INDEX (continued)
Exhibit No. Description ------- ---------------------------------------------------------------------- 10.13 Loan commitment and construction loan agreement between the Registrant and Deck Enterprises, filed as Exhibit 10.13 to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 1993 10.14 Lease between the Registrant and Deck Enterprises, filed as Exhibit 10.14 to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 1993 10.15 Amended Employment Agreement between the Registrant and Charles H. O'Reilly, Jr., filed as Exhibit 10.17 to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 1996 10.16 Second Amendment to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, filed as Exhibit 10.20 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 10.17 Credit Agreement between the Registrant and NationsBank, N.A., dated October 16, 1997, filed as Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 10.18 O'Reilly Automotive, Inc. Performance Incentive Plan, filed as Exhibit 10.18 (a) to the Registrant's Annual Shareholders' Report on Form 10-K for the year ended December 31, 1996 10.19 Loan Agreement between the Registrant and Commerce Bank, N.A., dated October 1, 1997, filed as Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. 13.1 1997 Annual Report to Shareholders, filed herewith. Portions not specifically incorporated by reference in this Report are not deemed "filed" for the purposes of the Securities Exchange Act of 1934. 21.1 Subsidiaries of the Registrant, filed herewith. 23.1 Consent of Ernst & Young LLP, independent auditors, filed herewith. 27.1 Financial Data Schedule, filed herewith. 99.1 Certain Risk Factors, filed herewith. |
* Previously filed as Exhibit of same number to the Registration Statement of the Registrant on Form S-1, File No.33-58948, and incorporated herein 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 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
Retirement Agreement
This AGREEMENT made on this date, (Date), between O'Reilly Automotive, Inc. (the "Employer"), and (Employee), (the "Employee"), to take affect when the employee retires from regular employment.
Recitals
The services of the Employee, his experience and knowledge of the affairs of the Company, and his reputation and contacts both inside the Company as well as outside the Company are extremely valuable to the Employer, and
The Employer desires the Employee to remain in its service and wishes to receive the benefit of his knowledge, experience, reputation, and contacts for a period of ten years after his retirement, and is willing to offer the Employee an incentive to do so in the form of retirement compensation and death and disability benefits,
It is therefore agreed:
1. Obligations of Employer.
A. Consultation. After the Employee retires from Employer, he shall be employed as a consultant for a period of ten years, at a yearly salary of $100,000, payable in equal monthly installments. No payment shall be made, however, unless the Employee performs all the required terms and conditions of this Agreement.
B. Additional compensation for the executive or surviving spouse will include:
(1) Full participation for the executive and spouse in the company health insurance program.
(2) Participation in the medical reimbursement plan for Senior Management which pays all medical/dental expenses not covered by the Health Insurance Plan up to $3,500 per year.
(3) Use and maintenance, including fuel, of a late model car, replaceable every three years.
(4) Employee will continue to serve on the Board of Directors of Employer unless otherwise voted by the shareholders of Employer.
(5) Use of Company plane will be available, as Company schedule permits, at the preferred Company rate per hour, such rate to be determined from time to time, by the CEO and COO of the Company.
(6) Premiums paid by Employer for split-dollar life insurance will continue for the duration of this agreement or until Employee ends any subsequent consulting agreements with Employer.
C. Death or disability. If the Employee dies or becomes totally disabled during this ten year period, his yearly salary of $100,000 shall continue for the balance of the ten year period as compensation for service up until that time. Such payments shall be made to the Employee if living, or if not, to persons that the Employee has designated in writing before his death, or if no such designation was made to the Employee's surviving spouse, or if none then equally to his heirs-at-law.
2. Duties of Employee:
A. Consultation services. During the period of ten years after his retirement, the Employee shall perform all advisory and consultative services that the Employer may reasonably request, in order that the Employer may continue to benefit from the Employee's experience, knowledge, reputation and contacts in the industry. The Employee shall be available to advise and counsel
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 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 (continued)
the Employer's officers and directors at all reasonable times by telephone, mail, or in person. However, the Employee's failure to render such services or to give such advice and counsel due to illness shall not affect his right to receive compensation during that period.
B. Competition restriction. During the period of ten years after his retirement, the Employee shall not become associated with, engage in, or render service to any other business in competition with the Employer.
3. Failure to perform. If the Employee shall fail to substantially perform all the terms and conditions of this Agreement, he shall forfeit his rights to all subsequent compensation that the Employer is required to pay to him or others.
4. No assignment. The Employee may not assign his interest in this Agreement without the Employer's written consent.
5. Binding effect. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the Employer. The Company also agrees to cause any person, firm, or corporation which acquires the Company or its operating assets to assume the obligations of the Company under this Agreement.
6. Notice. Any notice to be delivered under this Agreement shall be given in writing and delivered, personally or by certified mail, postage prepaid, addressed to the Company or Employee at their last known addresses.
7. Non-waiver. No delay or failure by either party to exercise any right under this Agreement, and no partial or single exercise of that right, shall constitute a waiver of that or any other right.
8. Headings. Headings in the Agreement are for convenience only and shall not be used to interpret or construe its provisions.
9. Governing law. This Agreement shall be construed in accordance with and governed by the laws of the State of Missouri.
10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
In witness whereof the Employee has signed this Agreement, and the President of the Employer has signed, in the name of the Employer, pursuant to a resolution adopted by its Board of Directors.
O'Reilly Automotive, Inc.
By /s/ David O'Reilly ------------------------- /s/ (Employee) ------------------------- Employee |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders
Selected Consolidated Financial Data
-------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Year Ended December 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (In Thousands, Except Per Share Data) INCOME STATEMENT DATA: Product sales $316,399 $259,243 $201,492 $167,057 $137,164 $110,147 $94,937 $82,372 $71,935 $59,728 Cost of goods sold, including warehouse and distribution expenses 181,789 150,772 116,768 97,758 82,102 65,066 56,255 50,027 44,930 36,246 -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- -------- Gross profit 134,610 108,471 84,724 69,299 55,062 45,081 38,682 32,345 27,005 23,482 Operating, selling, general and administrative expenses 97,526 79,620 62,687 52,142 42,492 35,204 29,961 26,750 23,231 19,281 -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- -------- Operating income 37,084 28,851 22,037 17,157 12,570 9,877 8,721 5,595 3,774 4,201 Other income (expense), net 472 1,182 236 376 216 204 (104) (566) (367) (245) Provision for income taxes 14,413 11,062 8,182 6,461 4,556 3,686 3,167 1,837 1,269 1,437 -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- -------- Income from continuing operations before cumulative effects of changes in accounting principles 23,143 18,971 14,091 11,072 8,230 6,395 5,450 3,192 2,138 2,519 Cumulative effects of changes in accounting principles - - - - - (163) - - - - -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- -------- Income from continuing operations 23,143 18,971 14,091 11,072 8,230 6,232 5,450 3,192 2,138 2,519 Income (loss) from discontinued operations - - - - 48 129 (68) (186) (49) 22 -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- -------- Net income $ 23,143 $ 18,971 $ 14,091 $ 11,072 $ 8,278 $ 6,361 $ 5,382 $ 3,006 $ 2,089 $ 2,541 ================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ======== Basic Earnings Per Common Share: Income per share from continuing operations before cumulative effects of changes in accounting principles $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15 $ 0.35 ================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ======== Income per share from continuing operations $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15 $ 0.35 Income (loss) per share from discontinued operations - - - - - 0.01 - (0.01) - - -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- -------- Net income per share $ 1.10 $ 0.91 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.21 $ 0.15 $ 0.35 ================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ======== Cash dividends per share $ - $ - $ - $ - $ - $ 0.0009 $ 0.0008 $ 0.0008 $ 0.0008 $ 0.0007 Weighted average common shares outstanding 21,043 20,864 17,820 17,310 16,470 14,718 14,654 14,622 14,612 7,238 ================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ======== Earnings Per Common Share - Assuming Dilution: Income per share from continuing operations before cumulative effects of changes in accounting principles $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.22 $ 0.15 $ 0.35 ================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ======== Income per share from continuing operations $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.42 $ 0.37 $ 0.22 $ 0.15 $ 0.35 Income (loss) per share from discontinued operations - - - - - 0.01 - (0.01) - - -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- -------- Net income per share $ 1.09 $ 0.90 $ 0.79 $ 0.64 $ 0.50 $ 0.43 $ 0.37 $ 0.21 $ 0.15 $ 0.35 ================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ======== Weighted average common shares outstanding - adjusted (d) 21,277 21,032 17,902 17,389 16,523 14,718 14,654 14,622 14,612 7,238 ================================ ========= ========= ========= ========= ========= ========= ========= ========= ========= ======== |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Selected Consolidated Financial Data (continued)
-------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- -------- Year ended December 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 -------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- -------- (In thousands, Except Selected Operating Data) SELECTED OPERATING DATA: Number of stores at year end (a) 259 219 188 165 145 127 116 112 106 98 Total store square footage at year end (in 000's) (b) 1,454 1,155 923 785 671 571 511 480 427 386 Weighted average product sales per store (in 000's) (b) $1,306.0 $1,238.5 $1,101.2 $1,007.1 $948.9 $837.8 $759.1 $690.3 $637.2 $592.2 Weighted average product sales per square foot (b) $235.8 $242.2 $227.3 $215.4 $208.7 $187.2 $174.4 $166.2 $160.0 $150.5 Percentage increase in same-store product sales (c) 6.8% 14.4% 8.9% 8.9% 14.9% 11.4% 9.2% 11.2% 8.5% * BALANCE SHEET DATA: Working capital $93,763 $74,403 $80,471 $41,416 $41,193 $15,251 $13,434 $11,634 $9,853 $9,378 Total assets 247,617 183,623 153,604 87,327 73,112 58,871 49,549 46,148 45,200 31,620 Short-term debt 130 3,154 231 311 495 3,462 1,298 2,281 3,897 3,341 Long-term debt, less current portion 22,641 237 358 461 732 2,668 3,326 5,082 5,684 5,475 Long-term debt related to discontinued operations, less current portion - - - - - 9,873 10,316 9,901 9,961 1,967 Stockholders' equity 182,039 155,782 133,870 70,224 57,805 29,281 22,881 17,480 14,471 12,346 |
* Because the Company was in the process of upgrading its accounting system, certain data required to provide comparable store product sales information for 1988 is not available.
(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. Additionally, two stores were closed during 1997. No other stores were closed during the periods presented.
(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 O'Reilly stores open during both full periods being compared. Percentage increase in same-store product sales is calculated based on O'Reilly store sales results which exclude sales of specialty machinery, sales by outside salesmen and sales to employees.
(d) No additional dilution resulting from stock options existed until 1993. Stock was not dilutive until 1993 when options were first granted.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
The information discussed below in Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements regarding matters that are not historical facts (including statements as to beliefs or expectations of O'Reilly Automotive, Inc. ["the Company"]) which are forward-looking statements. Because such forward-looking statements include risks and uncertainties, including those risks discussed in Exhibit 99.1 to the Company's 1997 Form 10-K, the Company's actual results could differ materially from those discussed below.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of O'Reilly Automotive, Inc.'s ("the Company's") financial condition, results of operations and liquidity and capital resources should be read in conjunction with the consolidated financial statements of the Company, related notes and other financial information included elsewhere in this annual report.
RESULTS OF OPERATIONS
The following table sets forth certain income statement data of the Company as a
percentage of product sales for the years included:
----------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 ----------------------------------------------------------------------------------------------------------------- Product sales 100.0% 100.0% 100.0% Cost of goods sold, including warehouse and distribution expenses 57.5% 58.2% 58.0% ----------------------------------------------------------------------------------------------------------------- Gross profit 42.5% 41.8% 42.0% Operating, selling, general and administrative expenses 30.8% 30.7% 31.1% ----------------------------------------------------------------------------------------------------------------- Operating income 11.7% 11.1% 10.9% Other income, net 0.1% 0.5% 0.1% ----------------------------------------------------------------------------------------------------------------- Income before income taxes 11.8% 11.6% 11.0% Provision for income taxes 4.5% 4.3% 4.0% ----------------------------------------------------------------------------------------------------------------- Net income 7.3% 7.3% 7.0% ================================================================================================================= |
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 the opening of 40 (net) O'Reilly stores during
1997 and a $15.6 million, or 6.8% increase in same-store product sales.
Management believes that the consumer acceptance experienced by these new
O'Reilly stores and the increased product sales achieved by the existing
O'Reilly stores is the result of the continuation of media advertising by the
Company during 1997 at comparable levels to those set in 1996, an increase in
the broad selection of stock keeping units ("SKU's") available at the newer or
recently renovated or relocated O'Reilly stores, the increase in inventory
levels at most O'Reilly stores, and the increasing penetration of the general
geographic markets in which the Company operates.
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 increased volume discounts obtained by the Company and other economies of scale. The increase was partially offset by continued price competition among automotive parts retailers. Management believes that price competition among national and regional automotive parts retailers will continue to influence gross profit margins in 1998 and beyond.
Operating, selling, general and administrative expenses ("OSG&A 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 OSG&A expenses resulted primarily from the new store openings and additions to administrative staff and facilities which occurred during 1997 in order to support the increased level of the Company's operations.
The Company's 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 the Company's 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.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
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.
1996 COMPARED TO 1995
Product sales increased $57.8 million, or 28.7%, from $201.5 million in 1995 to
$259.2 million in 1996 due to the opening of 31 new O'Reilly stores during 1996
and a $25.8 million, or 14.4% increase in same-store product sales. Management
believes that the consumer acceptance experienced by the new O'Reilly stores and
the increased product sales achieved by the existing O'Reilly stores is the
result of the continuation of media advertising by the Company during 1996 at
levels comparable to 1995, an increase in the broad selection of SKU's available
at the newer O'Reilly stores, the increase in inventory levels at most O'Reilly
stores, and the increasing penetration of the general geographic markets in
which the Company operates.
Gross profit increased 28.0% from $84.7 million (or 42.0% of product sales) in 1995 to $108.5 million (or 41.8% of product sales) in 1996. The decrease in gross profit margin was primarily attributable to the continued price competition among automotive parts retailers. The decrease was partially offset by lower product costs resulting from increased volume discounts obtained by the Company and other economies of scale achieved.
Operating, selling, general and administrative expenses increased $16.9 million from $62.7 million (or 31.1% of product sales) in 1995 to $79.6 million (or 30.7% of product sales) in 1996. The increased dollar amount of OSG&A expenses resulted primarily from the new store openings and additions to administrative staff and facilities which occurred during 1996 in order to support the increased level of the Company's operations. The decrease in OSG&A expenses as a percent of product sales in 1996 compared to 1995 was primarily due to economies of scale resulting from increased product sales.
The Company's provision for income taxes increased from 36.7% of income before income taxes in 1995 to 36.8% in 1996. The increase in the effective income tax rate was primarily due to more of the Company's sales occurring in states with higher income tax rates.
Principally as a result of the foregoing, net income in 1996 was $19.0 million, or 7.3% of product sales, an increase of $4.9 million (or 34.6%) from net income in 1995 of $14.1 million, or 7.0% of product sales.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.9 million in 1995, $4.9 million
in 1996 and $17.9 million in 1997. The increase in 1996 compared to 1995 is
principally the result of increases in net income and accounts payable,
partially offset by increases in inventory and accounts receivable. The increase
in inventory is due to the addition of 31 new stores, an increase in inventory
levels at most O'Reilly stores and the opening of the Oklahoma City distribution
center. 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 of 40 net new stores and an increase in inventory levels at most
O'Reilly stores and the distribution centers.
Net cash used in investing activities was $49.9 million in 1995, $11.2 million in 1996, and $37.7 million in 1997. The decrease in cash used in 1996 compared to 1995 was primarily due to an increase in the net proceeds from the sale and purchase of short-term investments, offset by increased capital expenditures. 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.
Capital expenditures were $28.6 million in 1995, $34.5 million in 1996, and $37.2 million in 1997. These expenditures were primarily related to the opening of new O'Reilly stores as well as relocation or remodeling of existing O'Reilly stores. The Company opened 23 new stores and remodeled or relocated 21 stores in 1995. In 1996, the Company opened 31 new stores and remodeled or relocated 32 stores. During 1997, the Company opened 40 (net) new stores and remodeled or relocated 28 stores. Also, in 1995, 1996 and 1997, the Company purchased real estate for new stores and store relocations totaling approximately $6.0 million, $7.8 million and $8.1 million, respectively. The Company purchased real estate for the Oklahoma City distribution center totaling $0.8 million in 1995. Construction costs for the Oklahoma City distribution center, which was completed in March 1996, totaled approximately $3.1 million. In 1997, the Company purchased real estate for the Des Moines distribution center totaling $0.7 million.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Construction costs-to-date for the Des Moines distribution center, which is scheduled to be completed in late 1998, totaled $0.2 million at December 31, 1997.
The Company's continuing store expansion program requires significant capital expenditures and working capital principally for inventory requirements. The Company plans to finance this expansion through cash expected to be provided from operating activities and available long-term bank borrowings.
On July 8, 1997, the Company's 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 November 1995, the Company sold 1,600,000 shares of common stock through a public offering. The net proceeds from that offering amounted to $47.7 million. A portion of the proceeds were used to repay the Company's outstanding indebtedness under its bank credit facilities and the remainder was used to fund the Company's expansion program during 1995 and 1996.
At December 31, 1997, the Company had available an unsecured line of credit with NationsBank, under which the Company could borrow up to $32.5 million until October 2000. Borrowings outstanding under the line of credit bore interest at LIBOR plus 0.5% (6.22% as of December 31, 1997). At December 31, 1997, $15.7 million was outstanding under the line of credit. This debt was replaced with the long-term credit facility described below.
The Company also had an unsecured revolving credit facility available with Commerce Bank, N.A., of Springfield, Missouri, under which the Company could borrow up to $32.5 million upon compliance with various minimum financial ratios. This credit facility bore interest at LIBOR plus 0.5% (6.22% at December 31, 1997) and was scheduled to mature in September 2000. At December 31, 1997, $6.8 million was outstanding under this credit facility. This debt was also replaced with the long-term credit facility described below.
In January 1998, the Company acquired 100% ownership of Hi-Lo Automotive, Inc. ("Hi/LO"), and its subsidiaries. This acquisition added 189 stores located in Texas, Louisiana and California, as well as a distribution center located in Houston, Texas, to the Company. Consideration given in this acquisition included $47.8 million, or $4.35 per common share, for all issued and outstanding common shares.
Financing obtained subsequent to December 31, 1997, replaced existing credit facilities and provided financing for the Hi/LO acquisition. The new syndicated credit agreement, in the amount of $175 million, includes a five-year revolving credit facility of $125 million, of which $10 million is a swing line facility to fund short-term financing requirements, and a five-year term loan of $50 million. This credit agreement is guaranteed by the subsidiaries of the Company and the acquired Hi/LO subsidiaries. Management believes that funding sources for repayment of the long-term obligations will be sufficiently provided by the newly acquired and existing operations of the Company.
Management believes that the Company's existing cash and short-term investments, cash expected to be provided by operating activities, current bank credit facilities available and trade credit will be sufficient to fund both the short and long-term capital and liquidity needs of the Company for the foreseeable future.
INFLATION AND SEASONALITY
The Company has been successful, in many cases, in reducing the effects of
merchandise cost increases principally by taking advantage of vendor incentive
programs, economies of scale resulting from increased volume of purchases and
selective forward buying. As a result, management does not believe its
operations have been materially affected by inflation.
The Company's business is seasonal to some extent primarily as a result of the impact of weather conditions on store sales. Store sales and profits have historically been higher in the second and third quarters (April through September) of each year than in the first and fourth quarters.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
YEAR 2000
Management has developed a plan to modify the Company's information technology
to recognize the year 2000 and has begun converting critical data processing
systems. The Company's Year 2000 initiative is being managed by a team of
internal staff and management. Management currently expects the project to be
substantially complete by early 1999 and that the cost of the Year 2000
initiative, principally including internal costs, will not be material to the
Company's results of operations or financial position. Furthermore, this project
is not expected to have a significant effect on operations. The Company will
continue to implement systems with strategic value though some projects may be
delayed due to resource constraints.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which
encourages (but does not require) companies to adopt a fair value based method
of accounting for stock-based compensation plans, in place of the provisions of
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). If
the fair value based method of accounting is not adopted, SFAS No. 123 requires
companies to disclose pro forma calculations in the notes to their financial
statements of net income and net income per share as if the fair value based
method of accounting had been applied. The Company has elected to follow APB 25
and related Interpretations in accounting for its employee stock options because
the alternative fair value accounting provided for under SFAS No. 123 requires
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 employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share," which requires the presentation of earnings per share by all companies that have issued common stock or potential common stock if those securities trade in a public market either on a stock exchange or in the over-the-counter market. This statement supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share." The earnings per share amounts prior to 1997 have been restated as required to comply with SFAS No. 128.
Other recent pronouncements of the FASB, which are not required to be adopted until 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 display of 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 Company has not yet determined the effects, if any, the adoption will have on the Company's financial statements. Applicability of SFAS No. 130 will not impact amounts previously reported for net 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 Company has not yet determined the effects, if any, the adoption will have on the Company's financial statements.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Balance Sheets
December 31, 1997 1996 --------------------------------------------------------------------------------------------------------------- (In Thousands, Except Share Data) Assets Current assets: Cash $ 2,285 $ 1,207 Short-term investments (Note 2) 1,000 1,000 Accounts receivable, less allowance for doubtful accounts of $363 in 1997 and $444 in 1996 12,469 11,296 Inventory 111,848 83,909 Deferred income taxes (Note 10) 1,424 -- Refundable income taxes -- 172 Other current assets 5,114 2,568 ------------------------------- Total current assets 134,140 100,152 Property and equipment, at cost: Land 28,000 19,954 Buildings 53,507 35,379 Leasehold improvements 9,230 8,082 Furniture, fixtures and equipment 36,362 29,311 Vehicles 10,434 8,494 ------------------------------- 137,533 101,220 Accumulated depreciation and amortization 29,093 21,435 ------------------------------- 108,440 79,785 Notes receivable 2,280 1,510 Other assets 2,757 2,176 ------------------------------- Total assets $247,617 $183,623 =============================== |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Balance Sheets (continued)
December 31, 1997 1996 --------------------------------------------------------------------------------------------------------------- (In Thousands, Except Share Data) Liabilities and stockholders' equity Current liabilities: Notes payable to bank (Note 4) $ -- $ 3,000 Accounts payable 29,713 17,288 Accrued expenses 6,386 3,953 Accrued payroll 1,647 1,043 Income taxes payable 2,501 -- Deferred income taxes (Note 10) -- 311 Current portion of long-term debt (Note 5) 130 154 ------------------------------- Total current liabilities 40,377 25,749 Long-term debt, less current portion (Note 5) 22,641 237 Postretirement benefit obligation (Note 7) 415 403 Deferred income taxes (Note 10) 2,145 1,452 Stockholders' equity (Notes 8 and 11): 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 - 21,125,493 in 1997 and 20,937,014 in 1996 211 105 Additional paid-in capital 77,077 73,964 Retained earnings 104,751 81,713 ------------------------------- Total stockholders' equity 182,039 155,782 ------------------------------- Total liabilities and stockholders' equity $247,617 $183,623 =============================== See accompanying notes. |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Statements of Income
Year ended December 31, 1997 1996 1995 ---------------------------------------------------------------------------------------------------------------- (In Thousands, Except Per Share Amounts) Product sales $316,399 $259,243 $201,492 Cost of goods sold, including warehouse and distribution expenses 181,789 150,772 116,768 Operating, selling, general and administrative expenses (Note 3) 97,526 79,620 62,687 ----------------------------------------------------- 279,315 230,392 179,455 ----------------------------------------------------- Operating income 37,084 28,851 22,037 Other income (expense): Interest expense (139) (37) (299) Interest income 198 676 342 Other, net 413 543 193 ----------------------------------------------------- 472 1,182 236 ----------------------------------------------------- Income before income taxes 37,556 30,033 22,273 Provision for income taxes (Note 10) 14,413 11,062 8,182 ----------------------------------------------------- Net income $ 23,143 $ 18,971 $ 14,091 ===================================================== Basic earnings per common share: Net income per common share $1.10 $.91 $.79 ===================================================== Weighted average common shares outstanding 21,043 20,864 17,820 ===================================================== Earnings per common share - assuming dilution: (Note 9) Net income per common share - assuming dilution $1.09 $.90 $.79 ===================================================== Adjusted weighted average common shares outstanding 21,277 21,032 17,902 ===================================================== |
See accompanying notes.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Statements of Stockholders' Equity
Additional Common Stock Paid-In Retained Shares Par Value Capital Earnings Total ------------------------------------------------------------------------------------------------------------------ (In Thousands) Balance at December 31, 1994 17,358 $ 87 $21,486 $48,651 $70,224 Issuance of common stock through public offering 3,200 16 47,696 -- 47,712 Issuance of common stock under employee benefit 92 1 1,191 -- 1,192 plans Issuance of common stock under stock option plans 74 -- 651 -- 651 Net income -- -- -- 14,091 14,091 ----------------------------------------------------------- Balance at December 31, 1995 20,724 104 71,024 62,742 133,870 Issuance of common stock under employee benefit 93 -- 1,509 -- 1,509 plans 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 (Note 11) -- 105 -- (105) -- Issuance of common stock under employee benefit 73 -- 1,331 -- 1,331 plans 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 =========================================================== |
See accompanying notes.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Consolidated Statements of Cash Flows
Year ended December 31, 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------- (In Thousands) Operating activities Net income $23,143 $18,971 $14,091 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,276 6,105 4,038 Provision for doubtful accounts 662 592 467 Gain on sale of property and equipment (44) (281) (14) Deferred income taxes (1,042) 1,483 937 Common stock contributed to employee benefit plans 1,331 1,028 867 Tax benefit of stock options exercised 301 -- -- Postretirement benefits 12 12 10 Changes in operating assets and liabilities: Accounts receivable (1,835) (2,428) (2,285) Inventory (27,939) (24,930) (16,520) Refundable income taxes 172 564 (736) Other current assets (2,546) 130 (2,078) Other assets (581) (709) (321) Accounts payable 12,425 4,275 2,678 Accrued expenses 2,433 830 449 Accrued payroll 604 (765) 401 Income taxes payable 2,501 -- (1,104) ----------------------------------------------------- Net cash provided by operating activities 17,873 4,877 880 Investing activities Purchases of property and equipment (37,180) (34,459) (28,552) Proceeds from sale of property and equipment 293 801 119 Purchases of short-term investments -- (12,494) (32,410) Proceeds from sale of short-term investments -- 34,904 11,075 Payments received on notes receivable 898 51 47 Advances made on notes receivable (1,668) (21) (195) ----------------------------------------------------- Net cash used in investing activities (37,657) (11,218) (49,916) Financing activities Borrowings on notes payable to bank -- 3,000 9,100 Payments on note payable to bank -- -- (9,100) Proceeds from issuance of long-term debt 20,500 -- 15,776 Principal payments on long-term debt (1,120) (198) (15,959) Net proceeds from issuance of common stock 1,482 1,913 48,688 ---------------------------------------------------- Net cash provided by financing activities 20,862 4,715 48,505 ---------------------------------------------------- Net increase (decrease) in cash 1,078 (1,626) (531) Cash at beginning of year 1,207 2,833 3,364 ---------------------------------------------------- Cash at end of year $2,285 $1,207 $2,833 ==================================================== |
See accompanying notes.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
O'Reilly Automotive, Inc. ("the Company") is a specialty retailer and supplier
of automotive after-market parts, tools, supplies and accessories to both the
"Do-It-Yourself" consumer and the professional installer throughout Missouri,
Kansas, Oklahoma, Arkansas, Iowa and Nebraska. Additionally, upon the closing of
the acquisition of Hi-Lo Automotive, Inc. ("Hi/LO") effective January 31, 1998,
the Company has operations in Texas, Louisiana and California. See Note 13.
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.
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 $119,135,000 and $91,011,000 as of December 31, 1997
and 1996, respectively.
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 principal assets range from 3 to 40 years for property
and equipment. Maintenance and repairs are charged to expense as incurred.
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, 1997 and 1995, were $527,000 and $168,000, respectively. No capitalized interest costs were recorded for 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 $3,437,000, $3,156,000 and $2,797,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
PREOPENING COSTS
Costs associated with the opening of new stores, which consist primarily of
payroll and occupancy costs, are charged to operations as incurred.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 8, 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.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share." SFAS 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS 128 requirements.
Supplementary income per share amounts for 1995, calculated to give effect to the reduction of interest expense and the increase in the weighted average number of shares outstanding sufficient to retire certain short and long-term indebtedness, as if the secondary public offering in 1995 had occurred at the beginning of the year, would not be materially different than reported per share amounts.
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 6). The note receivable, amounting to $2,271,000 and $1,495,000 at December 31, 1997 and 1996, 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.
NOTE 2 - 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, 1997 and 1996, short-term investments consisted of
preferred equity securities.
NOTE 3 - RELATED PARTIES
The Company leases certain land and buildings related to its O'Reilly Auto Parts
stores under six-year operating lease agreements from O'Reilly Investment
Company and O'Reilly Real Estate Company, partnerships in which certain
stockholders 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 6). Rent expense under these operating leases totaled
$2,122,000 in 1997, $1,729,000 in 1996 and $1,701,000 in 1995.
NOTE 4 - NOTES PAYABLE TO BANKS
At December 31, 1996, the Company had available short-term unsecured bank lines
of credit for maximum borrowings of $32 million under which $3,000,000 was
outstanding. The lines of credit bore interest at LIBOR plus 1.00% to 1.25%, and
expired during 1997 and were replaced with the long-term credit facilities
described in Note 5.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 5 - LONG-TERM DEBT
The Company has available an unsecured bank line of credit providing for maximum
borrowings of $32.5 million under which $15,700,000 was outstanding at December
31, 1997. The line of credit, which bears interest at LIBOR plus 0.50% (6.22% at
December 31, 1997), expires in October 2000. (See Note 13.)
The Company also has available an unsecured revolving credit facility with a bank providing for maximum borrowings of $32.5 million, under which $6,800,000 was outstanding at December 31, 1997. This credit facility bears interest at LIBOR plus 0.50% (6.22% at December 31, 1997) and matures in September 2000. This agreement requires the Company to maintain various minimum financial ratios. (See Note 13.)
Additionally, the Company has various unsecured notes payable to individuals, amounting to $271,000 and $391,000, at December 31, 1997 and 1996, respectively. The notes bear interest at rates ranging from 6% to 9% and are due in monthly installments of approximately $25,000 including interest. The notes mature in varying amounts between 1998 and 2000, and $118,000 of such notes are guaranteed by certain stockholders of the Company.
Indirect borrowings under letters of credit and guarantees of indebtedness of others totaled $633,000 and $636,000 at December 31, 1997 and 1996, respectively.
Principal maturities of long-term debt for each of the next five years ending December 31, after giving effect to the refinancing described in Note 13, are as follows (amounts in thousands):
1998 $ 130 1999 98 2000 43 2001 -- 2002 -- Thereafter 22,500 ---------- $22,771 ========== |
Cash paid by the Company for interest during the years ended December 31, 1997, 1996 and 1995 amounted to $642,000, $35,000 and $581,000, respectively.
NOTE 6 - COMMITMENTS
The Company leases certain office space, property and equipment under long-term,
noncancelable operating leases. Future minimum rental payments, including
commitments of $2,142,000 per year through 1999 and $250,000 in total thereafter
in connection with the related-party leases described in Note 3, for each of the
next five years ending December 31 and in the aggregate are as follows (amounts
in thousands):
1998 $ 4,239 1999 3,951 2000 1,790 2001 1,569 2002 1,244 Thereafter 14,948 -------- $27,741 ========= |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 6 - COMMITMENTS (CONTINUED)
Rental expense amounted to $4,136,000,
$3,348,000, and $3,316,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Construction commitments totaled approximately $5.4 million at December 31, 1997.
NOTE 7 - 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 $1,485,000 in 1997, $1,229,000
in 1996 and $980,000 in 1995. 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:
Market Shares Value ----------------- ----------------- 1997 20,913 $415,000 1996 19,786 344,000 1995 21,348 297,000 |
Profit-sharing contributions accrued at December 31, 1997, 1996 and 1995 were funded in the next year through issuance of shares of the Company's common stock as follows:
Market Year Funded Shares Value -------------------- ------------------ ------------------ 1997 49,540 $884,000 1996 39,652 684,000 1995 43,018 570,000 |
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, 1997, 1996 and 1995 were $12,000, $12,000 and $10,000, respectively.
Additionally, the Company has adopted a stock purchase plan covering an aggregate of 500,000 shares of common stock under which approximately 350,000 shares of common stock are reserved for future issuance. Under the plan, substantially all employees and nonemployee 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, 32,584 shares were issued at an average price of $17.49 per share during 1997, 32,936 shares were issued at an average price of $14.61 per share during 1996 and 27,568 shares were issued at an average price of $11.77 per share during 1995.
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, 1,386 and 556 shares were issued during 1997 and 1996, respectively. No shares were issued under this plan in 1995.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 8 - 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 2,000,000 shares of common stock are 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 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 stockholder 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 five 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, 1994 $8.75 - $16.88 605,550 Granted 11.88 - 16.25 240,500 Exercised 8.75 - 13.00 (73,550) Canceled 8.75 - 16.13 (9,500) ------------------------ ---------------- 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 ======================== ================ |
Options to purchase 521,700, 637,700 and 522,500 shares of common stock were exercisable at December 31, 1997, 1996 and 1995, respectively.
The Company also maintains a stock option plan for nonemployee directors of the Company under which 100,000 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, 1994 $8.75 - $13.13 20,000 Granted 13.50 10,000 ----------------- -------------- 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 - 20.88 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 ================= ============== |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
All options under this plan were exercisable at December 31, 1997, 1996 and
1995.
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 nonemployee 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 1997, 1996 and 1995, respectively: risk-free interest rates of 5.53%, 5.39% and 5.43%; volatility factors of the expected market price of the Company's common stock of .200, .200 and .273; and weighted-average expected life of the options of 6.4, 3.5 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, 1997, 1996 and 1995 were $8.28, $4.79 and $4.09, respectively. The weighted-average remaining contract life at December 31, 1997 for all outstanding options under the Company's stock option plans is 5.6 years.
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: (amounts in thousands, except per share amounts)
1997 1996 1995 ---------- --------- --------- Pro forma net income $22,432 $18,494 $13,889 ========== ========= ========= Pro forma basic earnings per share $1.07 $0.89 $0.78 ========== ========= ========= Pro forma earnings per share - assuming dilution $1.05 $0.88 $0.78 ========== ========= ========= |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 9 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31, 1997 1996 1995 ----------------------------------------------- --------- --------- --------- (In thousands, except per share amounts) Numerator: Net income $23,143 $18,971 $14,091 --------- --------- --------- Numerator for basic earnings per share $23,143 $18,971 $14,091 ========= ========= ========= Numerator for diluted earnings per share $23,143 $ 18,971 $14,091 ========= ========= ========= Denominator: Denominator for basic earnings per share - weighted-average shares 21,043 20,864 17,820 Effect of employee stock options (Note 8) 234 168 82 --------- --------- --------- Denominator for diluted earnings per per share - adjusted weighted-average shares and assumed conversions 21,277 21,032 17,902 ========== ========= ========= Basic earnings per share $1.10 $.91 $.79 ========== ========= ========= Diluted earnings per share $1.09 $.90 $.79 ========== ========= ========= |
For additional disclosure regarding the employee stock options, see Note 8.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 10 - 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
(amounts in thousands):
1997 1996 ---------------- ---------------- Deferred tax assets: Current Allowance for doubtful accounts $138 $168 Vacation accrual 567 481 Inventory carrying value 636 -- Other accruals 83 152 ---------------- ---------------- 1,424 801 ---------------- ---------------- Noncurrent: Postretirement benefit obligation 158 153 ---------------- ---------------- Total deferred tax assets 1,582 954 ---------------- ---------------- Deferred tax liabilities: Current: Inventory carrying value -- 1,112 ---------------- ----------------- Noncurrent: Depreciation 2,273 1,605 Other accruals 30 -- ---------------- ----------------- Total deferred tax liabilities 2,303 2,717 ---------------- ----------------- Net deferred tax liabilities $ 721 $1,763 ================ ================= |
The provision for income taxes consists of the following (amounts in thousands):
Current Deferred Total ------------------- --------------------- ------------------ 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 =================== ===================== ================== 1995: Federal $6,473 $ 837 $ 7,310 State 772 100 872 ------------------- --------------------- ------------------ $7,245 $ 937 $ 8,182 =================== ===================== ================== |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 10 - INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the amounts computed at
the federal statutory rate is as follows (amounts in thousands):
1997 1996 1995 --------------------------------------- Federal income taxes at statutory rate $13,145 $10,512 $7,796 State income taxes, net of federal tax benefit 1,148 809 567 Other items, net 120 (259) (181) --------------------------------------- $14,413 $11,062 $8,182 ======================================= |
The tax benefit associated with the exercise of non-qualified stock options has been reflected as additional paid-in capital in the accompanying financial statements.
During the years ended December 31, 1997, 1996 and 1995, cash paid by the Company for income taxes amounted to $12,168,000, $9,015,000 and $9,085,000, respectively.
NOTE 11 - 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.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995
NOTE 12 - QUARTERLY FINANCIAL DATA - UNAUDITED
First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------------- (In Thousands, Except Per Share Data) 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: .24 .29 .31 .26 Net income per share - assuming dilution .24 .29 .31 .25 Year ended December 31, 1996 Product sales $55,321 $68,782 $70,432 $64,708 Gross profit 22,409 28,212 29,247 28,603 Operating income 6,154 7,678 8,294 6,725 Net income 4,088 4,947 5,422 4,514 Basic net income per share: .20 .24 .26 .22 Net income per share - assuming dilution .20 .24 .26 .21 |
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.
The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with SFAS No. 128, "Earnings per Share."
NOTE 13 - SUBSEQUENT EVENTS
Effective January 31, 1998, the Company acquired 100% of the outstanding capital
stock of Hi-Lo Automotive, Inc. and its subsidiaries. Hi/LO is a specialty
retailer which operates 189 retail stores throughout Texas, Louisiana and
California, supplying automotive after-market tools, supplies and accessories.
Hi/LO had sales of approximately $238.3 million for the year ended December 31,
1997. The purchase price was approximately $47.8 million, or $4.35 per common
share. This acquisition will be accounted for using the purchase method of
accounting.
In connection with this purchase, the Company replaced its existing credit facilities with a new $175 million credit agreement. This credit agreement includes a five-year revolving credit facility of $125 million, maturing in January 2003, of which $10 million is a swing line facility to fund short-term financing requirements, and a five-year term loan facility of $50 million which is payable in quarterly installments. This credit agreement is guaranteed by the subsidiaries of the Company and the acquired Hi/LO subsidiaries.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 13.1 - Portions of the 1997 Annual Report to Shareholders (continued)
NUMBER OF STOCKHOLDERS
As of December 31, 1997, O'Reilly Automotive, Inc. has approximately 7,500 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 prices 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.
1997 1996 High Low High Low -------------- -------------- ------------- ------------- First Quarter 19.063 15.500 17.750 14.375 Second Quarter 19.875 16.875 20.375 17.500 Third Quarter 26.000 18.875 19.125 17.125 Fourth Quarter 28.000 21.000 18.500 15.500 For The Year 28.000 15.500 20.375 14.375 |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 21.1 - Subsidiaries of the Company
Subsidiary State of Incorporation ----------------------------------- ----------------------- Ozark Automotive Distributors, Inc. Missouri Greene County Realty Co. Missouri O'Reilly II Aviation, Inc. Missouri Hi-Lo Automotive, Inc. Delaware |
One hundred percent of the capital stock of each of the above listed subsidiaries is directly owned by O'Reilly Automotive, Inc.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 23.1 - Consent of Ernst & Young LLP, independent auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K) of O'Reilly Automotive, Inc. and Subsidiaries of our report dated February 16, 1998, included in the 1997 Annual Report to Stockholders 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 Statement (Form S-8 No. 33-61632) pertaining to the O'Reilly Automotive, Inc. 1993 Stock Option Plan, Director Stock Option Plan, and Stock Purchase Plan, in the Registration Statement (Form S-8 No. 33-73892) pertaining to the O'Reilly Automotive, Inc. Profit Sharing and Savings Plan and in the Registration Statement (Form S-8 No. 33-91022) pertaining to the O'Reilly Automotive Performance Incentive Plan and 1993 Stock Option Plan of our report dated February 16, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of O'Reilly Automotive, Inc. for the year ended December 31, 1997.
/ s / Ernst & Young LLP --------------------------------- Ernst & Young LLP Kansas City, Missouri March 30, 1998 |
ARTICLE 5 |
This schedule contains summary financial information extracted from the Consolidated Balance Sheet at December 31, 1997 and 1996 (restated) and the Consolidated Statement of Income for the Twelve Months Ended December 31, 1997 and 1996 (restated) and is qualified in its entirety by reference to such financial statements. |
MULTIPLIER: 1,000 |
CURRENCY: US Dollar |
PERIOD TYPE | 12 Mos | 12 Mos |
FISCAL YEAR END | DEC 31 1997 | DEC 31 1996 |
PERIOD START | JAN 01 1997 | JAN 01 1996 |
PERIOD END | DEC 31 1997 | DEC 31 1996 |
EXCHANGE RATE | 1.00 | 1.00 |
CASH | $2,285 | $1,207 |
SECURITIES | 1,000 | 1,000 |
RECEIVABLES | 12,832 | 11,740 |
ALLOWANCES | 363 | 444 |
INVENTORY | 111,848 | 83,909 |
CURRENT ASSETS | 6,538 | 2,740 |
PP&E | 137,533 | 101,220 |
DEPRECIATION | 29,093 | 21,435 |
TOTAL ASSETS | 247,617 | 183,623 |
CURRENT LIABILITIES | 40,377 | 25,749 |
BONDS | 0 | 0 |
PREFERRED MANDATORY | 0 | 0 |
PREFERRED | 0 | 0 |
COMMON | 211 | 105 |
OTHER SE | 181,828 | 155,677 |
TOTAL LIABILITY AND EQUITY | 247,617 | 183,623 |
SALES | 316,399 | 259,243 |
TOTAL REVENUES | 317,010 | 260,462 |
CGS | 181,789 | 150,772 |
TOTAL COSTS | 97,526 | 79,620 |
OTHER EXPENSES | 0 | 0 |
LOSS PROVISION | 757 | 672 |
INTEREST EXPENSE | 139 | 37 |
INCOME PRETAX | 37,556 | 30,033 |
INCOME TAX | 14,413 | 11,062 |
INCOME CONTINUING | 23,143 | 18,971 |
DISCONTINUED | 0 | 0 |
EXTRAORDINARY | 0 | 0 |
CHANGES | 0 | 0 |
NET INCOME | 23,143 | 18,971 |
EPS PRIMARY | $1.10 | $0.91 |
EPS DILUTED | $1.09 | $0.90 |
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
Exhibit 99.1 - Certain Risk Factors
The following factors could affect the Company's actual results, including its revenues, expenses and net income, and could cause them to differ from any forward-looking statements made by or on behalf of the Company.
Competition
The Company competes with a large number of retail and wholesale automotive aftermarket product suppliers. The distribution of automotive aftermarket products is a highly competitive industry, particularly in the more densely populated market areas served by the Company. Competitors include national and regional automotive parts chains, independently owned parts stores (some of which are associated with national auto parts distributors or associations), automobile dealerships, mass or general merchandise, discount and convenience chains that carry automotive products, independent warehouse distributors and parts stores and national warehouse distributors and associations. Some of the Company's competitors are larger than the Company and have greater financial resources than the Company.
No Assurance of Future Growth
Management believes that the Company's ability to open additional stores at an accelerated rate will be a significant factor in achieving its growth objectives for the future. The ability of the Company to accomplish its growth is dependent, in part, on matters beyond the Company's 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. No assurance can be given that the Company's current growth rate can be maintained.
Dependence Upon Key and Other Personnel
The success of the Company has been largely dependent on the efforts of certain key personnel of the Company, including David E. O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr., Rosalie O'Reilly Wooten and Ted F. Wise. The loss of the services of one or more of these individuals could have a material adverse effect on the Company's business and results of operations. Additionally, in order to successfully implement and manage its growth strategy, the Company will be dependent upon its ability to continue to attract and retain qualified personnel. There can be no assurance that the Company will be able to continue to attract such personnel.
Concentration of Ownership by Management
The Company's executive officers and directors as a group beneficially own a substantial percentage of the outstanding shares of the Company's common stock. These officers and directors have the ability to exercise effective voting control of the Company, including the election of all of the Company's directors, and to effectively determine the vote on any matter being voted on by the Company shareholders, including any merger, sale of assets or other change in control of the Company.