Item 1. Business
O'Reilly Automotive, Inc. is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both do-it-yourself (DIY) customers and professional installers. At December 31, 2003, we operated 1,109 stores in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Tennessee, Texas and Virginia. Our stores carry an extensive product line consisting of:
o new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake shoes and pads, chassis parts and engine parts;
o maintenance items, such as oil, antifreeze, fluids, engine additives and appearance products;
o accessories, such as floor mats and seat covers; and
o a complete line of autobody paint and related materials, automotive tools and professional service equipment.
We do not sell tires or perform automotive repairs or installations.
We were founded in 1957 by Charles F. O'Reilly and his son, Charles H. "Chub" O'Reilly, Sr. and initially operated from a single store in Springfield, Missouri. The O'Reilly family has managed the Company since our inception.
Our goal is to continue to achieve growth in sales and profitability by capitalizing on our competitive advantages and executing our growth and expansion strategies.
See "Risk Factors" beginning on page 12 for a description of certain risks relevant to our business. These risk factors include, among others, risks related to competition in the automotive aftermarket business, our growth strategy, our acquisition strategy, our sensitivity to regional economic and weather conditions, our dependence upon key and other personnel and the significant voting control held by our principal shareholders.
Competitive Advantages
Proven Ability to Execute Dual Market Strategy. We have an established track record of serving both DIY customers and professional installers. We believe our ability to execute a dual market strategy is a competitive advantage, which enables us to:
o target a larger base of consumers of automotive aftermarket parts;
o capitalize on our existing retail and distribution infrastructure;
o profitably operate both in large markets and less densely populated geographic areas that typically attract fewer competitors; and
o enhance service levels offered to our DIY customers by offering a broad selection of stock keeping units (SKUs) and extensive product knowledge required by professional installers.
We have been committed to a dual market strategy for over 20 years. For 2003, we derived approximately 53% of our product sales from our DIY customers and approximately 47% from our professional installer customers. As a result of our historical success in executing our dual market strategy and our 173 full-time sales representatives dedicated solely to calling upon and selling to the professional installer, we believe we will increase the sales to professional installers and have a competitive advantage over our retail competitors who have only recently entered and begun focusing on the professional installer market.
Superior Customer Service. We seek to attract new DIY and professional installer customers and to retain existing customers by offering superior customer service, the key elements of which include:
o superior in-store service through highly-motivated, technically proficient store personnel (Professional Parts People) using advanced point-of-sale systems;
o an extensive selection of products;
o attractive stores in convenient locations; and
o competitive pricing, with a low price guarantee.
Technically Proficient Professional Parts People. Our highly proficient Professional Parts People provide us with a significant competitive advantage, particularly over less specialized retail operators. We require our Professional Parts People to undergo extensive and ongoing training and to be technically knowledgeable, particularly with respect to hard parts, in order to better serve the technically-oriented professional installers with whom they interact on a daily basis. Such technical proficiency also enhances the customer service we provide to our DIY customers, who appreciate the expert assistance provided by our Professional Parts People.
Strategic Distribution Systems. We believe that the geographic concentration of our store network in eighteen, contiguous states (Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Tennessee, Texas and Virginia) and the strategic locations of our ten distribution centers enable us to maintain optimum inventory levels throughout our store network. In addition, our inventory management and distribution systems electronically link each of our stores to a distribution center, providing for efficient inventory control and management. Our distribution system provides each of our stores with same day or overnight access to approximately 100,000 SKUs, many of which are hard to find items not typically stocked by other parts retailers. We believe the availability of a broad range of products is a key competitive advantage in satisfying customer demand and generating repeat business.
Experienced Management Team. Our management team has a demonstrated ability to successfully execute our business plan, including the identification and integration of strategic acquisitions. We have experienced eleven consecutive years of record revenues and earnings growth since becoming a public company in April 1993. We have a strong senior management team comprised of 57 professionals who average 16 years of experience with O'Reilly. In addition, our 106 district managers average over 9 years of experience with us.
Growth and Expansion Strategies
Aggressively Open New Stores. We intend to continue to aggressively open new stores in order to achieve greater penetration in existing markets and to expand into new, contiguous markets. We plan to open approximately 140 stores in 2004 and approximately 150 stores in 2005. A majority of the sites for our proposed 2004 store openings and several of the sites for our proposed 2005 store openings have been identified. In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies of scale in areas such as management, advertising and distribution.
We target both small (population less than 100,000) and large markets (population greater than 100,000) for expansion of our store network. Of the 128 net, new stores added in 2003, 25 are located in Alabama, 5 in Arkansas, 3 in Florida, 9 in Illinois, 1 in Indiana, 1 in Iowa, 2 in Kansas, 10 in Kentucky, 3 in Louisiana, 16 in Mississippi, 2 in Missouri, 15 in North Carolina, 17 in Tennessee, 18 in Texas and 1 in Virginia. While we have faced, and expect to continue to face, more aggressive competition in the more densely populated markets, we believe that we have competed effectively, and that we are well positioned to continue to compete effectively, in such markets and achieve our goal of continued sales and profit growth within these markets. We also believe that because of our dual market strategy, we are better able to operate stores in less densely populated areas within our regional market, which would not otherwise support a national or regional chain store selling to one portion of the market or the other. Consequently, we expect to continue to open new stores in less densely populated market areas.
To date, we have experienced no significant difficulties in locating suitable store sites for construction of new stores or identifying suitable acquisition candidates for conversion to O'Reilly stores. We typically open new stores either by (i) constructing a new store at a site we purchase or lease and stocking the new store with fixtures and inventory, or (ii) acquiring an independently owned auto parts store, typically by the purchase of substantially all of the inventory and other assets (other than realty) of such store. Store sites are strategically located in clusters within geographic areas that complement our distribution system in order to achieve economies of scale in management, advertising and distribution costs. Other key factors we consider in the site selection process include population density and growth patterns, age and per capita income, vehicle traffic counts, the number and type of existing automotive repair facilities, other competing auto parts stores, and other competitors within a pre-determined radius, and the operational strength of such competitors. When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in order to maximize the effect of initial promotional programs and achieve further economies of scale.
Same store growth through increased sales and profitability is also an important part of our growth strategy. To achieve improved sales and profitability at existing O'Reilly stores, we continually strive to improve upon the service provided to our customers. We believe that while competitive pricing is essential in the competitive environment of the automotive aftermarket business, it is customer satisfaction (whether of the DIY consumer or professional installer), resulting from superior customer service that generates increased sales and profitability.
Selectively Pursue Strategic Acquisitions. Although the automotive aftermarket industry is still highly fragmented, we believe the ability of national and regional specialty retail chains, such as O'Reilly, to operate more efficiently than smaller independent operators or mass merchandisers will result in continued industry consolidation. Thus, we intend to selectively pursue acquisition targets that will strengthen our position as a leading automotive products retailer.
Continually Enhance Store Design and Location. Our current prototype store design features enhancements such as greater square footage, higher ceilings, more convenient interior store layouts, brighter lighting, increased parking availability and dedicated counters to serve professional installers, each designed to increase product sales and operating efficiencies and enhance customer service. We continually update the location and condition of our store network through systematic renovation and relocation of our existing stores to conform with our prototype store design. We believe that our ability to consistently achieve growth in same store product sales is due in part to our commitment to maintaining an attractive store network, which is strategically located to best serve our customers.
Products and Purchasing
Our stores offer DIY and professional installer customers a wide selection of brand name and private label products for domestic and imported automobiles, vans and trucks. We do not sell tires or perform automotive repairs or installations. Our merchandise generally consists of nationally recognized, well-advertised, name brand products such as AC Delco, Moog, Murray, Wagner, Gates Rubber, Federal Mogul, Monroe, Prestone, Quaker State, Pennzoil, Castrol, Valvoline, STP, BWD, Cardone, Wix, Armor All and Turtle Wax. In addition to name brand products, our stores carry a wide variety of high-quality private label products under our O'Reilly Auto Parts, SuperStart, BrakeBest, Ultima, Master Pro and Omnispark proprietary name brands. Because most of our private label products are produced by nationally recognized manufacturers in accordance with our specifications, we believe that the private label products are generally of equal or, in some cases, better quality than comparable name brand products, a characteristic which is important to our professional installer clientele. We further believe that the private label products are packaged attractively to promote customer interest and are generally priced below comparable name brand products carried in our stores.
We purchase automotive products from approximately 400 vendors, the five largest of which accounted for approximately 38% of our total purchases in 2003. Our largest vendor in 2003 accounted for approximately 15% of our total purchases and the next four largest vendors accounted for 4-11% of such purchases each. We have no long-term contractual purchase commitments with any of our vendors, nor have we experienced difficulty in obtaining satisfactory alternative sources of supply for automotive parts. We believe that alternative supply sources exist at substantially similar costs, for substantially all automotive products that we sell. It is our policy to take advantage of payment and seasonal purchasing discounts offered by our vendors, and to utilize extended dating terms available from vendors due to volume purchasing. During 2003, we entered into various programs and arrangements with certain of our vendors that provide for extended dating and payment terms for inventory purchases, including pay-on-scan arrangements. We consider our relationships with our suppliers to be good.
Inflation and Seasonality
We have been successful, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. As a result, we do not believe our operations have been materially affected by inflation.
Our business is seasonal to some extent primarily as a result of the impact of weather conditions on store sales. Store sales and profits have historically been higher in the second and third quarters (April through September) of each year than in the first and fourth quarters.
Store Network
Store Locations. As a result of our dual market strategy, we are able to profitably operate in both large, densely populated markets and less densely populated areas that would not otherwise support a national or regional chain selling to just one portion of the automotive aftermarket. The following table sets forth the geographic distribution of our stores:
Our stores on average carry approximately 22,000 SKUs and average approximately 6,600 total square feet in size. At December 31, 2003, we had a total of approximately 7.3 million square feet in our 1,109 stores. Our stores are served primarily by the nearest distribution center, but also have access to the broader selection of inventory available at one of our 61 Master Inventory Stores, which on average carry approximately 36,000 SKUs and average approximately 8,800 square feet in size. Master Inventory Stores, in addition to serving DIY and professional installer customers in their markets, also provides our other stores within their area access to a greater selection of SKUs on a same-day basis.
We believe that our stores are "destination stores" generating their own traffic rather than relying on traffic created by the presence of other stores in the immediate vicinity. Consequently, most of our stores are freestanding buildings situated on or near major traffic thoroughfares, and offer ample parking and easy customer access.
Store Layout. We utilize a computer-assisted "plan-o-grammed" store layout system to provide a uniform and consistent merchandise presentation; however, some variation occurs in order to meet the specific needs of a particular market area. Merchandise is arranged to provide easy customer access and maximum selling space, keeping high-turnover products and accessories within view of the customer. Aisle displays are generally used to feature high-demand or seasonal merchandise, new items and advertised specials.
Store Automation. To enhance store level operations and customer service, we use IBM AS/400 computer systems in all of our stores. These systems are linked with the IBM AS/400 computers located in each of our distribution centers. Our point-of-sale terminals provide immediate access to our electronic catalog to display parts and pricing information by make, model and year of vehicle and use bar code scanning technology to price our merchandise. This system speeds transaction times, reduces register lines and provides enhanced customer service. Moreover, our store automation systems capture sales information which assists in store management, strategic planning, inventory control and distribution efficiency.
New Store Site Selection. In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies of scale in management, advertising and distribution. Other key factors we consider in the site selection process include:
o population density and growth patterns;
o age and per capita income;
o vehicle traffic counts;
o the number and type of existing automotive repair facilities; and
o the number of auto parts stores and other competitors within a pre-determined radius and the operational strength of such competitors.
When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in order to maximize the effect of initial promotional programs and achieve further economies of scale. After opening this initial cluster of new stores, we seek to begin penetrating the less densely populated surrounding areas. This strategy enables us to achieve additional distribution and advertising efficiencies in each market.
Distribution System
The following table sets forth the distribution centers we currently operate:
In addition, adjacent to the Springfield, Missouri distribution center, we operate a 36,000 square foot bulk merchandise warehouse used for the distribution of bulk products such as motor oil, antifreeze, batteries, lubricants and other fast moving bulk products, and a 20,000 square foot returned goods processing facility. We also operate a 31,000 square foot bulk warehouse in McAllen, Texas that serves the surrounding distribution centers with bulk products.
Our distribution centers are equipped with highly automated conveyor systems, which expedite the movement of our products to loading areas for shipment to individual stores on a nightly basis. The distribution centers utilize computer-assisted technology to electronically receive orders from computers located in each of our stores. In addition to the bar code system employed in our stores, we have established a satellite-based data interchange system among those stores in which high-speed data transmission technology is not readily available, the distribution center, which services such stores and our corporate headquarters.
We believe that our distribution system assists us in lowering our inventory-carrying costs, improving our store in-stock positions, and controlling and managing our inventory. Moreover, we believe that our expanding network of distribution centers allows us to more efficiently service existing stores, as well as new stores planned for opening in contiguous market areas. Our distribution center expansion strategy also complements our new store opening strategy by supporting newly established clusters of stores located in the regions surrounding each distribution center. As part of our continuing efforts to enhance our distribution network, in 2004 we plan to:
o continue to implement improvement plans to increase inventory turnover in all distribution centers; and
o upgrade material handling equipment in several distribution centers including conveyor systems, forklifts and racking.
Marketing
Marketing to the DIY Customer. We aggressively promote sales to DIY customers through an extensive advertising program, which includes direct mail and newspaper, radio and television advertising in selected markets. We believe that our advertising and promotional activities have resulted in significant name recognition in each of our market areas. Newspaper and radio advertisements are generally directed towards specific product and price promotions, frequently in connection with specific sale events and promotions. To promote sales to car enthusiasts, who we believe on an individual basis spend more on automotive products than the public generally, we sponsor 16 nationally televised races and over 288 motorsports races and car shows at over 200 facilities in 18 states, including, the NASCAR Craftsmen Truck Series, the NASCAR Busch Series race in Dallas, five National Hotrod Racing Association races in Topeka, Memphis, Houston and Dallas, as well as the O'Reilly Chili Bowl. O'Reilly Auto Parts is the "official auto parts store" of Texas Motor Speedway, Kansas Speedway, Bristol Motor Speedway, Houston Raceway Park, Texas Motorplex, Memphis Motorsports Park and Heartland Park. During 2003, we started work on branding the O'Reilly name in the NCAA. Our first initiative was to partner with Texas Tech University through a variety of programs including sponsoring of coach Knight's TV show, ads during games, placing the O'Reilly logo on the home basketball court and coach Knight's sweater, advertising on the backs of seats and banners for the scoring table. This has lead to additional opportunities with approximately 14 colleges in our current markets. We have found that the more progressive marketing concepts utilized in the DIY portion of our business can also be applied to increase sales to our professional installer customers.
Marketing to the Professional Installer. We have over 173 full-time O'Reilly sales representatives strategically located in the more densely populated market areas that we serve, and each is dedicated solely to calling upon and selling to the professional installer. Our First Call program, which is our commitment to the professional customer, includes a dedicated sales force, sales and promotions directed to the professional installer and overnight delivery service from the distribution center to the professional customer. Moreover, each district manager and store manager throughout our store network calls upon existing and potential new professional installer customers on a regular basis. Our First Call marketing strategy, with respect to professional installers, emphasizes our ability to offer:
o prompt delivery using small trucks or vans operated by virtually all of our stores;
o a separate counter in all of our stores dedicated exclusively to serving professional installers;
o trade credit for qualified professional installers;
o broad inventory of merchandise and competitive pricing;
o a professional installer computer system that connects directly to our inventory system; and
o seminars concerning topics of interest to professional installers, such as technical updates, safety and general business management.
Marketing to the Independently Owned Parts Store. Along with the operation of the distribution centers and the distribution of automotive products to the O'Reilly stores, Ozark Automotive Distributors, Inc. (Ozark) also sells automotive products to independently owned parts stores whose retail stores are generally located in areas not serviced by an O'Reilly store. We generally do not compete with any independently owned parts store to which we sell automotive products, but have, on occasion, acquired the business assets of an independently owned parts store supplied by Ozark. Ozark operates its own separate marketing program to independently owned parts stores through a staff of three.
Of the approximately 215 independently owned parts stores currently purchasing automotive products from Ozark, 211 participate in the Auto Value program through Ozark. As a participant in this program, an independently owned parts store which meets certain minimum financial and operational standards is permitted to indicate its Auto Value membership through the display of the Auto Value logo, which is owned by The Alliance, Inc. (formerly known as Auto Value Associates, Inc.), a non-profit buying group consisting of approximately 4,500 members as of December 31, 2003, including O'Reilly, engaged in the distribution or sale of automotive products. Additionally, we provide advertising and promotional assistance to Auto Value stores purchasing automotive products from Ozark, as well as marketing and sales support. In return for a commitment to purchase automotive products from Ozark, we offer assistance to an Auto Value independently owned parts store by making available computer software for inventory control.
Management Structure
Each of our stores is staffed with a store manager and an assistant manager, in addition to the parts specialists and support staff required to meet the specific needs of each store. Each of our 106 district managers has general supervisory responsibility for an average of 10 stores within such manager's district.
Each district manager receives comprehensive training on a bi-monthly basis, focusing on management techniques, new product announcements, advanced automotive systems and our policies and procedures. In turn, the information covered at such bi-monthly meetings is discussed in full by district managers at bi-monthly meetings with their store managers. All assistant managers and manager trainees are required to successfully complete a six-month manager training program, which includes classroom and field training, as a prerequisite to becoming a store manager. This program covers operations extensively, as well as principles of successful management. Shortly after becoming a store manager, all managers attend a manager development program, at the corporate office headquarters, which includes 72 hours of classroom training. Upon returning to the stores, managers are given continuous field training throughout their management experience.
We provide financial incentives to our district managers, store managers, assistant managers and sales specialists through an incentive compensation program. Under our incentive compensation program, base salary is augmented by incentive compensation based upon the achievement of sales and profitability goals. We believe that our incentive compensation program significantly increases the motivation and overall performance of our Professional Parts People and our ability to attract and retain qualified management and other personnel.
Most of our current senior management, district managers and store managers were promoted to their positions from within the Company. Our senior management team averages 16 years of experience with the Company and district managers have an average length of service with the Company of over 9 years.
Professional Parts People
We believe our highly trained team of Professional Parts People is essential in providing superior service both to DIY and professional installer customers. Each of our Professional Parts People is required to be technically proficient in the workings and application of automotive products due to the significant portion of our business represented by the professional installer. In addition, we have found that the typical DIY customer often seeks assistance from sales persons, particularly in connection with the purchase of hard parts. We believe that the ability of our Professional Parts People to provide such assistance to the DIY customer creates a favorable impression during a customer's visit to our store and is a significant factor in generating repeat DIY business.
We screen prospective employees, whom we refer to as team members, to identify highly motivated individuals either with experience in automotive parts or repairs, or an aptitude for automotive knowledge. Each person who becomes a team member first participates in an intensive two-day orientation program designed to introduce the team member to our culture and his or her job duties before being assigned specific job responsibilities. The successful completion of additional training is required before a team member is deemed qualified as a parts specialist and thus able to work at the parts counter of one of our stores. All new counter people are required to successfully complete a six-month basic automotive systems training course and are then enrolled in a six-month advanced automotive systems course for certification by the National Institute for Automotive Service Excellence (ASE), which administers national exams for various automotive specialties and requires ASE certified specialists to take recertification exams every five years.
Each of our stores participates in our sales specialist training program. Under this program, selected team members complete two days of extensive sales call training for business development, after which these team members will spend one day per week calling on existing and new professional installer customers. Additionally, each team member engaged in such sales activities will participate in quarterly advanced training programs for sales and business development.
Customer Service
We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient locations with a wide selection of automotive products. We believe that the satisfaction of DIY and professional installer customers is substantially dependent upon our ability to provide, in a timely fashion, the specific automotive product requested. Accordingly, each O'Reilly store carries a broad selection of automotive products designed to cover a wide range of vehicle specifications. We continuously refine the inventory levels carried in our stores, based in large part on the sales movement shown by our computerized inventory control system and on management's assessment of the changes and trends in the marketplace.
Pricing
We believe that a competitive pricing policy is essential within product categories in order to compete successfully. Product pricing is generally established to meet the pricing policies of competitors in the market area served by each store. Most automotive products that we sell are priced at discounts to the manufacturer suggested prices, and additional savings are offered through volume discounts and special promotional pricing. Consistent with our low price guarantee, each of our stores will match any verifiable price on any in-stock product of the same or comparable quality offered by any of our competitors.
Competition
We compete in both the DIY and professional installer portions of the automotive aftermarket. We compete primarily with:
o national and regional retail automotive parts chains (such as AutoZone, Inc., Advance Auto Parts, CSK Auto Corp. and The Pep Boys-Manny, Moe and Jack, Inc.);
o independently owned parts stores;
o wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations such as NAPA and CarQuest);
o automobile dealers; and
o mass merchandisers that carry automotive replacement parts, maintenance items and accessories (such as Wal-Mart Stores, Inc.).
We compete on the basis of customer service, which includes merchandise selection and availability, price, helpfulness of store personnel and store layout and location.
Team Members
As of December 31, 2003, we had 12,635 full-time team members and 2,919 part-time team members, of whom 12,023 were employed at our stores, 2,587 were employed at our distribution centers and 944 were employed at our corporate and administrative headquarters. Our team members are not subject to a collective bargaining agreement. We consider our relations with our team members to be excellent, and strive to promote good relations with our team members through various programs designed for such purposes.
Servicemarks and Trademarks
We have registered the servicemarks O'Reilly Automotive, O'Reilly Auto Parts, and Parts Payoff and the trademarks SuperStart, BrakeBest, Omnispark, First Call, Ultima, and Master Pro. Further, we are licensed to use the registered trademarks and servicemarks Auto Value and Parts Master owned by The Alliance (formerly Auto Value Associates) in connection with our marketing program. We believe that our business is not otherwise dependent upon any patent, trademark, servicemark or copyright.
Regulations
Although subject to various laws and governmental regulations relating to our business, including those related to the environment, we do not believe that compliance with such laws and regulations has a material adverse effect on our operations. Further, we are unaware of any failure to comply with any such laws and regulations that could have a material adverse effect on our operations. We can not give any assurance, however, that we will not incur significant expenses in the future in order to comply with any such law or regulation.
Internet Address and Access to SEC Filings
Our Internet address is www.oreillyauto.com. Interested readers can access the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, through the Securities and Exchange Commissions website at www.sec.gov. Such reports are generally available on the day they are filed. Additionally, the Company will furnish interested readers a paper copy of such reports, upon request, free of charge.
Risk Factors
Some of the information in this Form 10-K contains and future reports and press releases and other public information may contain forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate," and "continue" or similar words. These "forward-looking statements" are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (See Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.) You should read statements that contain these words carefully because they: (1) discuss our future expectations; (2) contain projections of our future results of operations or of our financial condition; or (3) state other "forward-looking" information. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to accurately predict or over which we have no control.
The risk factors listed in this section, as well as any cautionary language in this Form 10-K, are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired business, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described in these forward-looking statements. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this Form 10-K could have a material adverse effect on our business, operating results and financial condition.
The Automotive Aftermarket Business is Highly Competitive
Both the DIY and professional installer portions of our business are highly competitive, particularly in the more densely populated areas that we serve. Some of our competitors are larger than we are and have greater financial resources. In addition, some of our competitors are smaller than we are overall but have a greater presence than we do in a particular market. For a list of our principal competitors, see the ''Competition'' section of Item 1 of this Form 10-K.
We Cannot Assure Future Growth
We believe that our ability to open additional stores at an accelerated rate will be a significant factor in achieving our growth objectives for the future. Failure to achieve our growth objectives may negatively impact the trading price of our common stock. Our ability to accomplish our growth objectives is dependent, in part, on matters beyond our control, such as weather conditions, zoning and other issues related to new store site development, the availability of qualified management personnel and general business and economic conditions. We cannot be sure that our growth plans for 2004 and beyond will be achieved. For a discussion of our growth strategies, see the "Growth and Expansion Strategies" section of Item 1 of this Form 10-K.
Acquisitions May Not Lead to Expected Growth
We expect to continue to make acquisitions as an element of our growth strategy. Acquisitions involve certain risks that could cause our actual growth to differ from our expectations. For example: (1) we may not be able to continue to identify suitable acquisition candidates or to acquire additional companies at favorable prices or on other favorable terms; (2) our management's attention may be distracted; (3) we may fail to retain key acquired personnel; (4) we may assume unanticipated legal liabilities and other problems; and (5) we may not be able to successfully integrate the operations (accounting and billing functions, for example) of businesses we acquire to realize economic, operational and other benefits.
Sensitivity to Regional Economic and Weather Conditions
All of our stores are located in the Central and Southern United States. In particular, approximately 34% of our stores are located in Texas. Therefore, our business is sensitive to the economic and weather conditions of these regions. Unusually severe or inclement weather tends to reduce sales, particularly to DIY customers.
Dependence Upon Key and Other Personnel
Our success has been largely dependent on the efforts of certain key personnel, including David O'Reilly, Ted Wise, Greg Henslee and Jim Batten. Our business and results of operations could be materially adversely affected by the loss of the services of one or more of these individuals. Additionally, our successful implementation and management of our growth and expansion strategies will depend on our ability to continue to attract and retain qualified personnel. We cannot be sure that we will be able to continue to attract such personnel. For a further discussion of our management and personnel, see the ''Business'' section of Item 1 and Item 4a of this Form 10-K and our Proxy Statement on Schedule 14A for the 2004 Annual Meeting of Shareholders, a portion of which is incorporated herein.
Significant Voting Control is held by the O'Reilly Family
As of the date of this Form 10-K, the O'Reilly family beneficially owns approximately 10%, or 5,255,582 number of shares, of the outstanding shares of our common stock. As a result, the O'Reilly family, if they act, acting together represents one of the largest known blocks of our shares and may continue to be a significant factor in any matter voted on by our shareholders, including the election of our directors and any merger, sale of assets or other change in control.
Possible Volatility of Our Stock Price
The stock market and the price of our common stock may be subject to volatile fluctuations based on general economic and market conditions. The market price for our common stock may also be affected by our ability to meet analysts' expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management's attention and resources, which could have an adverse effect on our business.
Shares Eligible for Future Sale
All of the shares of common stock currently held by our affiliates may be sold in reliance upon the exemptive provisions of Rule 144 of the Securities Act of 1933, as amended, subject to certain volume and other conditions imposed by such rule. We cannot predict the effect, if any, that future sales of shares of common stock or the availability of such shares for sale will have on the market price of the common stock prevailing from time to time. Sales of substantial amounts of common stock, or the perception that such sales might occur, could adversely affect the prevailing market price of the common stock.
Item 2.
Item 2. Properties
The following table provides certain information regarding our administrative offices and distribution centers and offices as of December 31, 2003:
Of the 1,109 stores that we operated at December 31, 2003, 375 stores were owned, 664 stores were leased from unaffiliated parties and 70 stores were leased from one of three entities owned by the O'Reilly family. Leases with unaffiliated parties generally provide for payment of a fixed base rent, payment of certain tax, insurance and maintenance expenses, and an original term of 10 years, subject to one or more renewals at our option. We have entered into separate master lease agreements with each of the affiliated entities for the occupancy of the stores covered thereby. Such master lease agreements expire on December 31, 2004. We believe that the lease agreements with the entities are on terms comparable to those obtainable from third parties.
We believe that our present facilities are in good condition, are adequately insured and together with those under construction, are suitable and adequate for the conduct of our current operations.
Item 3.
Item 3. Legal Proceedings
The Company is involved in various other legal proceedings incidental to the conduct of its business. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, they will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
Item 4.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 2003.
Item 4A. Executive Officers of the Company
The following paragraphs discuss information about executive officers of the Company who are not also directors:
Ted F. Wise, age 53, Co-President, has been an O'Reilly team member for 33 years. Mr. Wise's primary areas of responsibilities are Sales, Operations and Real Estate. He began his O'Reilly career in sales in 1970, was promoted to store manager in 1973, and became our first district manager in 1977. He continued his progression through the ranks as Operations Manager, Vice President, Senior Vice President focusing on Operations and Sales, and Executive Vice President. In July 1999, he was promoted to President of Sales, Operations and Real Estate.
Greg L. Henslee, age 43, Co-President, has been an O'Reilly team member for 19 years. Mr. Henslee's primary areas of responsibilities are Merchandise, Systems and Distributions. His O'Reilly career started as a Parts Specialist, and during his first five years he served in several positions in retail store operations, including District Manager. From there he advanced to Computer Operations Manager, and over the past ten years, he has served as Director of Computer Operations/Loss Prevention, Vice President of Store Operations and as Senior Vice President. He has been in his current position as President of Merchandise, Distribution, Information Systems and Loss Prevention since July 1999.
James R. Batten, CPA, age 41, Executive Vice President of Finance, Chief Financial Officer and Treasurer has been an O'Reilly team member for 11 years. Mr. Batten's primary areas of responsibility are Accounting and Finance. His O'Reilly career started as Finance Manager in January 1993 where he served until being promoted to Chief Financial Officer in March 1994. Prior to joining us in January 1993, Mr. Batten was employed by the accounting firms of Whitlock, Selim & Keehn, from 1986 to 1993 and Deloitte, Haskins & Sells from 1984 until 1986.
PART II
Item 5.
Item 5. Market For Registrant's Common Equity And Related Shareholder Matters
Common Stock Market Prices and Dividend Information on page 56 of the Annual Shareholders' Report for the year ended December 31, 2003, under the captions, "Market Prices and Dividend Information" and "Number of Shareholders," are incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data
Selected Financial Data on pages 26 and 27 of the Annual Shareholders' Report for the year ended December 31, 2003, under the caption "Selected Consolidated Financial Data," is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 28 through 35 of the Annual Shareholders' Report for the year ended December 31, 2003, under the caption, "Management's Discussion and Analysis of Financial Condition and Results of Operations," is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
At December 31, 2003, we had floating rate obligations totaling approximately $20.0 million for amounts outstanding under our revolving line of credit and long-term debt. These floating rate obligations expose us to the risk of increased interest expense in the event of increases in short-term rates. If the floating interest rate were to increase by 100 basis points (or 1%) from December 31, 2003 levels, our interest expense would increase by a total of approximately $16,667 per month.
Item 8.
Item 8. Financial Statements And Supplementary Data
The Company's consolidated financial statements, the notes thereto and the report of Ernst & Young LLP, independent auditors, on pages 36 through 52 of the Annual Shareholders' Report for the year ended December 31, 2003, under the captions, "Consolidated Financial Statements," "Notes to Consolidated Financial Statements" and "Report of Independent Auditors," are incorporated herein by reference.
Item 9.
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
None.
Item 9A.
Item 9A. Disclosure and Internal Control
The Company's management, under the supervision and with the participation of our chief executive officer and chief financial officer, have reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures as of December 31, 2003. Based on such review and evaluation, our chief executive officer and chief financial officer have concluded that the disclosure controls and procedures were effective as of December 31, 2003, to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and (b) is accumulated and communicated to the Company's management, including the officers, as appropriate to allow timely decisions regarding required disclosure. There were no material changes in the Company's internal control over financial reporting during the fourth quarter of 2003 that have materially affected or are reasonably likely to materially affect the Company's internal controls over financial reporting.
PART III
Item 10.
Item 10. Directors And Executive Officers Of The Registrant
The information regarding the directors of the Company contained in the Company's Proxy Statement on Schedule 14A for the 2004 Annual Meeting of Shareholders (the Proxy Statement) under the caption "Proposal 1-Election of Class II Directors" is incorporated herein by reference. The Proxy Statement is being filed with the Securities and Exchange Commission within 120 days of the end of the Company's most recent fiscal year end. The information regarding executive officers called for by item 401 of Regulation S-K is included in Part I as Item 4A, in accordance with General Instruction G(3) to Form 10-K, for the executive officers of the Company who are not also directors.
The Company has adopted a code of ethics that applies to all of its directors, officers (including its chief executive officer, chief financial officer, chief accounting officer, controller and any person performing similar functions) and employees. The Company has filed a copy of this Code of Ethics as an exhibit to this Form 10-K. The Company has also made the Code of Ethics available on its website at www.oreillyauto.com.
The Company's Board of Directors has determined that Mr. Murphy, Chairman of the Audit Committee, is a financial expert and independent, under the standards of Rule 10A-3 and that Mr. Murphy qualifies as an audit committee financial expert under Item 401(h)(2) of Regulation S-K and is presumed to satisfy The Nasdaq Marketplace Rule 4350(d)(2) requirements.
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 included in the Company's Proxy Statement under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934" is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The material in the Proxy Statement under the caption "Executive Compensation", other than the material under the captions "Compensation Committee Report", "Audit Committee Report" and "Performance Graph" is incorporated herein by reference.
Item 12.
Item 12. Security Ownership Of Certain Beneficial Owners And Management
Information regarding equity compensation plans of the Company in the Proxy Statement under the caption "Securities Authorized for Issuance Under Equity Compensation Plans" is incorporated herein by reference. The material in the Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners" is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships And Related Transactions
The material in the Proxy Statement under the caption "Transactions with Insiders and Others" is incorporated herein by reference.
Item 14.
Item 14. Principal Accountant Fees and Services
The material in the Proxy Statement under the caption "Fees Paid to Independent Auditors" is incorporated herein by reference.
Item 15.
Item 15. Exhibits, Financial Statement Schedule And Reports On Form 8-K
(a) 1. Financial Statements-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statements of O'Reilly Automotive, Inc. and Subsidiaries included in the Annual Shareholders' Report of the registrant for the year ended December 31, 2003, are incorporated herein by reference in Part II, Item 8:
Consolidated Balance Sheets as of December 31, 2003, and 2002 (page 36)
Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001 (page 37)
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002, and 2001 (page 38)
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001 (page 39)
Notes to Consolidated Financial Statements for the years ended December 31, 2003, 2002, and 2001 (pages 40-51)
Report of Independent Auditors (page 52)
(a) 2. Financial Statement Schedule-O'Reilly Automotive, Inc. and Subsidiaries
The following consolidated financial statement schedule of O'Reilly Automotive, Inc. and Subsidiaries is included in Item 15(d):
Schedule II-Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a) 3. Management Contracts and Compensatory Plans or Arrangements
Each of the Company's management contracts and compensatory plans or arrangements is identified in the Exhibit Index.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated April 24, 2003, that contained financial results for the quarter ended March 31, 2003.
The Company filed a Current Report on Form 8-K dated October 31, 2003, that contained financial results for the quarter ended September 30, 2003.
The Company filed a Current Report on Form 8-K dated November 12, 2003, that contained a press release stating that the Company's Board of Directors had approved and adopted an amendment to the Amended and Restated Bylaws of the Company.
The Company filed a Current Report on Form 8-K dated November 19, 2003, that contained a press release stating that the Company planed to make a presentation at the Morgan Stanley First Annual Small Cap Executive Conference in Scottsdale, Arizona.
The Company filed a Current Report on Form 8-K dated December 24, 2003, that contained a press release announcing that John Murphy and Ronald Rashkow had been appointed to the Company's Board of Directors effective December 19, 2003.
(c) Exhibits
See Exhibit Index on page E-1.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
O'REILLY AUTOMOTIVE, INC. (Registrant)
Date: March 12, 2004 By /s/ David E. O'Reilly ----------------------------------------- David E. O'Reilly Co-Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
EXHIBIT INDEX
Page E-1
Page E-2
EXHIBIT INDEX (continued)
- --------------------
* Previously filed as Exhibit of same number to the Registration Statement of the Registrant on Form S-1, File No. 33-58948, and incorporated here by this reference.
(a) Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c) of Form 10-K.
Page E-3
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan
O'REILLY AUTOMOTIVE, INC. 2003 EMPLOYEE STOCK OPTION PLAN
I. Purpose of the Plan.
The O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan (the "Plan") is intended to provide a means whereby certain key employees of O'Reilly Automotive, Inc., a Missouri corporation (the "Company"), may develop a sense of proprietorship and personal involvement in the development and financial success of the Company and its subsidiaries, and to encourage them to remain with and devote their best efforts to the business of the Company and its subsidiaries, thereby advancing the interests of the Company and its shareholders. Accordingly, the Company may make awards to certain employees in the form of stock options ("Options") with respect to shares of the Company's common stock, par value $0.01 per share (the "Stock"). Options may either be nonqualified stock options ("Nonqualified Options") or options ("Incentive Stock Options") that are intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
II. Administration.
(a) Committee Composition. The Plan shall be administered by a committee of the Board of Directors of the Company (the "Board") consisting of not less than two members of the Board as the Board may appoint (the "Committee"). The members of the Committee shall be "Non-Employee Directors" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), and "outside directors" as defined under Section 162(m) of the Code; provided, however, that noncompliance with such qualifications shall not invalidate any grants of Options by the Committee. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee, however caused, shall be filled by the Board. The Committee shall act by a majority of its members in office and the Committee may act either by vote at a telephonic or other meeting or by a consent or other written instrument signed by all of the members of the Committee. If the Committee does not exist, or for any other reason determined by the Board, the Board mat take any action under the Plan that would otherwise be the responsibility of the Committee.
(b) Committee Authority. The Committee shall have the sole authority to: (i) determine the terms and provisions of the Option agreements (the "Agreements") entered into under the Plan; (ii) prepare and distribute, in such manner as the Committee determines to be appropriate, information about the Plan; and (iii) make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee may vary the terms and provisions of the individual Agreements in its discretion. Further, the Committee shall have authority to grant options and to determine the exercise price of the Stock covered by each Option, the terms and duration of each Option, the key employees to whom, and the times at which, Options shall be granted, whether the Option shall be a Nonqualified Option or an Incentive Stock Option and the number of shares to be covered by each Option. Notwithstanding the foregoing, the Committee shall not have the authority to make any determination that would be inconsistent with the requirements, restrictions, prohibitions or limitations specified in the Plan.
(c) Day-to-Day Administration. The day-to-day administration of the Plan may be carried out by such officers and employees of the Company as shall be designated from time to time by the Committee. All expenses and liabilities incurred by the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, brokers or other persons, and the Committee, the Board, the Company and the officers and employees of the Company shall be entitled to rely upon the advice, opinions or valuations of any such persons. The interpretation and construction by the Committee of any provision of the Plan and any determination by the Committee under any provision of the Plan shall be final and conclusive for all purposes. Neither the Committee nor any member thereof shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith, and the members of the Committee shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including counsel fees) arising therefrom to the fullest extent permitted by law. The members of the Committee shall be named as insureds in connection with any directors and officers liability insurance coverage that may be in effect from time to time.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan (continued)
III. Shares Subject to the Plan.
The aggregate number of shares that may be issued under the Plan shall not exceed 4,000,000 shares of Stock plus all shares authorized under the 1993 Employee Stock Option Plan not covered by an option on the date such plan expires. No more than 1,000,000 shares of Stock may be subject to Options that are intended to be "performance-based compensation" (as that term is used for purposes of Section 162(m) of the Code) granted to any one individual during any calendar year, regardless of when such shares are deliverable. The shares of Stock issuable under the Plan may consist of authorized but unissued shares of Stock or previously issued shares of Stock reacquired by the Company. Any of such shares that remain unsold and that are not subject to outstanding Options at the termination of the Plan shall cease to be subject to the Plan, but until termination of the Plan and the expiration of all Options granted under the Plan, the Company shall at all times make available a sufficient number of shares to meet the requirements of the Plan and the outstanding Options. If any Option, in whole or in part, expires or terminates unexercised or is cancelled or forfeited, the shares theretofore subject to such Option may again be subject to an Option granted under the Plan. The aggregate number of shares that may be issued under Options granted under the Plan and any maximums set forth in this Plan shall be subject to adjustment as provided in Article V hereof. The issuance of Stock pursuant to the exercise of an Option shall result in a decrease in the number of shares of Stock that may thereafter be available for purposes of the Plan by the number of shares as to which the Option is exercised or cancelled.
IV. Grants of Options.
(a) Type and Number. Options granted under the Plan shall be of such type (Nonqualified Option or Incentive Stock Option) and for such number of shares of Stock and subject to such terms and conditions as the Committee shall designate. The Committee may grant Options at any time and from time to time through, but not after, May 6, 2013, to any individual eligible to receive the same. For purposes of the Plan, the date on which an Option is granted is referred to herein as the "Grant Date."
(b) Option Agreement. Options granted pursuant to the Plan shall be evidenced by Agreements that shall comply with and be subject to the terms and conditions set forth in this Section IV and may contain such other provisions, consistent with the Plan, as the Committee shall deem advisable. Each Agreement shall state the total number of shares of Stock that are subject to the Option. References herein to "Agreements" shall include, to the extent applicable, any amendments to such Agreements.
(c) Persons Eligible to Receive Options.
(i) Only key employees of the Company or its subsidiaries shall be eligible to receive Options under the Plan. In granting Options to an employee, the Committee shall take into consideration the contribution the employee has made or may make to the success of the Company or its subsidiaries and such other considerations as the Committee shall determine. The Committee shall also have the authority to consult with and receive recommendations from officers and other employees of the Company and its subsidiaries with regard to these matters. In no event shall any employee, his legal representatives, heirs, legatees, distributees, or successors have any right to participate in the Plan, except to such extent, if any, as the Committee shall determine.
(ii) Options may be granted under the Plan from time to time in substitution for stock options and stock appreciation rights granted by other corporations (the "Acquired Corporation") to their employees who become key employees of the Company or of any of its subsidiaries as a result of a merger or consolidation of the Acquired Corporation with the Company or any such subsidiary, or the acquisition by the Company or a subsidiary of all or substantially all of the assets of the Acquired Corporation or the acquisition by the Company or a subsidiary of stock of the Acquired corporation.
(d) Exercise Price.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan (continued)
(i) The exercise price of each share of Stock covered by each Option ("Exercise Price") shall not be less than one hundred percent (100%) of the Market Value Per Share (as defined below) of the Stock on the date the Option is granted; provided, however, if and when an Incentive Stock Option is granted and the employee receiving the Incentive Stock Option owns or will be considered to own by reason of Section 424(d) of the Code more than ten percent (10%) of the total combined voting power of all classes of stock of the Company (a "10% Shareholder"), the Exercise Price of the Stock covered by such Incentive Stock Option shall not be less than one hundred and ten percent (110%) of the Market Value Per Share of the Stock on the Grant Date of the Incentive Stock Option.
(ii) "Market Value Per Share" of the Stock shall mean: (A) if the Stock is not publicly traded, the amount determined by the Committee on the date of the grant of the Option; (B) if the Stock is traded only otherwise than on a securities exchange and is not quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the closing quoted selling price of the Stock on the date of grant of the Option as quoted in "pink sheets" published by the National Daily Quotation Bureau; (C) if the Stock is traded only otherwise than on a securities exchange and is quoted on NASDAQ, the closing quoted selling price of the Stock on the date of grant of the Option, as reported by the Wall Street Journal; or (D) if the Stock is admitted to trading on a securities exchange, the closing quoted selling price of the Stock on the date of grant of the Option, as reported in the Wall Street Journal.
(e) Exercisability of Options.
(i) An Option may be exercisable in installments or otherwise upon such terms as the Committee shall determine when the Option is granted. The Committee may fix such waiting and/or vesting periods, exercise dates or other limitations as it shall deem appropriate with respect to Options granted under the Plan including, without limitation, making the exercisability thereof contingent upon the achievement of specific goals. Notwithstanding the foregoing, however, in no event shall an Option, or any portion thereof, be exercisable until at least six months after the date of grant of such Option.
(ii) The Committee at any time: (A) may accelerate the time at which any Option granted hereunder is exercisable or otherwise vary the terms of an Option, notwithstanding the fact that such variance may cause the Option to be treated as a Nonqualified Option; (B) in the case of a Nonqualified Option, may permit the transferability of such Option and may remove any restrictions or conditions to which a Nonqualified Option is subject; and (C) subject to the consent of the optionee, may convert an outstanding Incentive Stock Option to a Nonqualified Option if it deems such conversion to be in the best interest of the optionee.
(iii)No Option shall be exercisable (and any attempted exercise shall be deemed null and void) if such exercise would create a right of recovery for "short-swing profits" under Section 16(b) of the Act, unless the optionee pays the Company the amount of such "short-swing profits" at the time of the exercise of the Option.
(iv) To the extent that the aggregate Market Value Per Share (determined at the Grant Date) of Stock with respect to which Incentive Stock Options (determined without regard to this sentence) are exercisable for the first time by any individual during any calendar year (under all plans of the Company and its subsidiaries) exceeds One Hundred Thousand Dollars ($100,000), such excess portion of such Incentive Stock Options shall be treated as Nonqualified Options (this sentence shall be applied by taking Incentive Stock Options into account in the order in which they were granted).
(f) Method of Exercise and Payment of Exercise Price.
(i) Options may be exercised by giving written notice to the Company stating the number of shares for which the Option is being exercised, accompanied by payment in full of the Exercise Price relating to the shares with respect to which the Option is so exercised.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan (continued)
(ii) The full Exercise Price for the shares with respect to which the Option is being exercised shall be payable to the Company: (A) in cash or by check payable and acceptable to the Company; (B) subject to the approval of the Committee, by tendering to the Company shares of Stock owned by the optionee having an aggregate Market Value Per Share as of the date of exercise that is not greater than the full Exercise Price for the shares with respect to which the Option is being exercised, provided that such shares shall have been then owned by the optionee for a period of at least six months prior to such exercise, and by paying any remaining amount of the Exercise Price as provided in (A) above; or (C) subject to the approval of the Committee and to such instructions as the Committee may specify, at the optionee's written request the Company may deliver certificates for the shares of Stock for which the Option is being exercised to a broker for sale on behalf of the optionee, provided that the optionee has irrevocably instructed such broker to remit directly to the Company on the optionee's behalf the full amount of the Exercise Price from the proceeds of such sale; provided, however, that in the case of an Incentive Stock Option, (B) and (C) above shall apply only if Committee approval is given on or prior to the Grant Date and the Agreement expressly provides for such optional payment terms. In the event that the optionee elects to make payment as allowed under clause (B) above, the Committee may, upon confirming that the optionee owns the number of shares of Stock being tendered, authorize the issuance of a new certificate for the number of shares being acquired pursuant to the exercise of the Option less the number of shares being tendered upon the exercise and return to the optionee (or not require surrender of) the certificate for the shares of Stock being tendered upon the exercise. Payment instruments will be received subject to collection.
(iii)Notwithstanding any other provision of the Plan, the Company shall have no liability to deliver any shares of Stock under the Plan or make any other distribution of benefits under the Plan unless such delivery or distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act of 1933, as amended), and the applicable requirements of any securities exchange, the NASDAQ or similar entity. If the employee fails to timely accept delivery of and pay for the shares specified in such notice, the Committee shall have the right to terminate the Option with respect to such shares.
(g) Term.
(i) The term of each Option shall be determined by the Committee at the Grant Date; provided, however, that each Option shall, notwithstanding anything in the Plan or any Agreement to the contrary, expire not more than ten years (five years with respect to an Incentive Stock Option granted to an employee who is a 10% Shareholder) from the Grant Date or, if earlier, the date specified in the Agreement.
(ii) In the event an individual's employment with the Company and its subsidiaries shall terminate for reasons other than: (i) retirement in accordance with the terms of a retirement plan of the Company or one of its subsidiaries ("Retirement"); (ii) permanent disability (as defined in Section 22(e)(3) of the Code); or (iii) death, the individual's Options shall terminate as of the date of such termination of employment and shall not be exercisable to any extent as of and after such time.
(iii)If any termination of employment is due to Retirement or permanent disability, the individual shall have the right to exercise any Option at any time within the 12-month period (three-month period in the case of Retirement for Options that are Incentive Stock Options) following such termination of employment, but only to the extent that the Option was exercisable immediately prior to such termination of employment. Notwithstanding any other provision contained in the Plan or the Agreements, if the termination of employment is due to retirement, and such retiring individual at the time of his or her retirement (A) is at least fifty-five (55) years of age, and (B) the sum of the individual's age and years of service to the Company is equal to or greater than eighty (80) years, then all outstanding options granted to such retiring individual shall automatically become immediately exercisable within such 12-month period (three month period in the case of Options that are Incentive Stock Options).
(iv) Whether any termination of employment is due to Retirement or permanent disability and whether an authorized leave of absence or absence for military or government service or for other reasons shall constitute a termination of employment for purposes of the Plan shall be determined by the Committee in its sole discretion.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan (continued)
(v) If an individual shall die while entitled to exercise an Option, the individual's estate, personal representative or beneficiary, as the case may be, shall have the right to exercise the Option at any time within the 12-month period following the date of the optionee's death, to the extent that the optionee was entitled to exercise the same on the day immediately prior to the optionee's death.
(vi) The right of an individual to exercise an Option shall terminate to the extent that such Option is exercised.
V. Corporate Transactions and Adjustment.
(a) Effect on Corporate Actions. The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board of Directors or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merge' or consolidation of the Company with or into another entity, any issuance of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Stock or the rights thereof, the dissolution or liquidation of the Company or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding.
(b) Adjustment. The shares with respect to which Options may be granted are shares of Stock as presently constituted. If, however, the number of outstanding shares of Stock are increased or decreased, or such shares are exchanged for a different number or kind of shares or securities of the Company through reorganization, merger, recapitalization, reclassification, stock dividend, stock split, combination of shares or other similar transaction, the aggregate number of shares of Stock subject to the Plan and any maximums set forth in Section III hereof, and the shares of Stock subject to issued and outstanding Options under the Plan shall be appropriately and proportionately adjusted by the Committee. Any such adjustment in an outstanding Option shall be made without change in the aggregate Exercise Price applicable to the unexercised portion of the Option but with an appropriate adjustment in the price for each share or other unit of any security covered by the Option.
(c) No Adjustment Upon Issuance of Securities. Except as may otherwise be expressly provided in the Plan, the issuance by the Company of shares of capital stock of any class or securities convertible into shares of capital stock of any class for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares of capital stock or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock available under the Plan or subject to Options theretofore granted or the Exercise Price per share with respect to outstanding Options.
(d) Final Determination. Adjustments under this Section shall be made by the Committee whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan or in connection with any such adjustment.
(e) Automatic Termination of Plan and Options. Notwithstanding anything to the contrary contained in this Section V, upon: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, or (iii) a sale of substantially all of the assets of the Company, the Plan shall terminate, and any outstanding Options granted under the Plan shall terminate on the day before the consummation of the transaction; provided that the Committee shall have the right, but not the obligation, to accelerate the time in which any Options may be exercised prior to such a termination. However, the termination of such Options shall not occur if provision is made in writing in connection with the transaction, in a manner acceptable to the Committee, for: (A) the continuance of the Plan and assumption of outstanding Options, (B) the substitution for such Options of new options to purchase the stock of a successor corporation (or parent or subsidiary thereof), with appropriate adjustments as to number and kind of shares and option price or (C) other treatment of the Options acceptable to the Committee. The Committee shall have the authority to amend this paragraph to provide for a requirement that a successor corporation assume any outstanding Options.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan (continued)
VI. Term of Plan.
No Option shall be granted pursuant to the Plan after ten (10) years from the earlier of the date of adoption of the Plan by the Board of the Company or the date of approval by the Company's shareholders. Notwithstanding the foregoing, if a longer term is permitted with respect to the duration of an incentive stock option plan under law, the Board may extend the term of this Plan to a term not to exceed the longest term permitted with respect to an incentive stock option plan.
VII. Amendment and Termination of Plan.
(a) Authority to Amend and Terminate. The Board may, from time to time, with respect to any shares at the time not subject to Options, suspend or terminate the Plan or amend or revise the terms of the Plan; provided that any amendment to the Plan shall be approved by a majority of the shareholders of the Company if the amendment would (i) materially increase or decrease the benefits accruing to participants under the Plan; (ii) increase or decrease the number of shares of Stock which may be issued under the Plan, except as permitted under the provisions of Section V above; or (iii) materially modify the requirements as to eligibility for participation in the Plan.
(b) Consent of Optionholder Required. Subject to the provisions in Section V above, no amendment, suspension or termination of this Plan shall, without the consent of the optionee, alter or impair any rights or obligations under any Option granted to such optionee under the Plan.
VIII. Effective Date of Plan.
The Plan shall become effective upon adoption by the Board and approval by the Company's shareholders; provided, however, that prior to approval of the Plan by the Company's shareholders but after adoption by the Board, Options may be granted under the Plan subject to obtaining such approval.
IX. Preemption by Applicable Laws and Regulations.
Anything in the Plan or any Agreement entered into pursuant to the Plan to the contrary notwithstanding, if, at any time specified herein or therein for the making of any determination with respect to the issuance or other distribution of shares of Stock, any law, regulation or requirement of any governmental authority having jurisdiction in the premises shall require either the Company or the optionee (or the optionee's beneficiary), as the case may be, to take any'action in connection with any such determination, the issuance or distribution of such shares or the making of such determination shall be deferred until such action shall have been taken.
X. Miscellaneous.
(a) Taxes and Withholding. All distributions under the Plan are subject to withholding of all applicable taxes, and the Committee may condition the delivery of any shares or other benefits under the Plan on satisfaction of the applicable withholding obligations. The Committee, in its discretion, and subject to such requirements as the Committee may impose prior to the occurrence of such withholding, may permit such withholding obligations to be satisfied through cash payment by the optionee, through the surrender of shares of Stock that the optionee already owns, or through the surrender of shares of Stock to which the optionee is otherwise entitled under the Plan.
(b) No Employment Contract. Nothing contained in the Plan shall be construed as conferring upon any optionee the right to continue in the employ of the Company or any of its subsidiaries.
(c) Employment with Subsidiaries. Employment by the Company for the purpose of this Plan shall be deemed to include employment by, and to continue during any period in which an employee is in the employment of, any subsidiary.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.29 - O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan (continued)
(d) No Rights as a Shareholder. An optionee shall have no rights as a shareholder with respect to shares covered by such optionee's Option until the date of the issuance of shares to the optionee upon the optionee's exercise of the Option. No adjustment will be made for dividends or other distributions or rights for which the record date is prior to the date of such issuance.
(e) No Right to Corporate Assets. Nothing contained in the Plan shall be construed as giving any optionee, such optionee's beneficiaries or any other person any equity or other interest of any kind in any assets of the Company or any subsidiary or creating a trust of any kind or a fiduciary relationship of any kind between the Company or any subsidiary and any such person. Any optionee shall have only a contractual right to shares of Stock as set forth in the Agreement, unsecured by any assets of the Company or any subsidiary, and nothing contained in the Plan shall constitute a guarantee that the assets of the Company or any subsidiary shall be sufficient to pay any benefits to any person.
(f) No Restriction on Corporate Action. Nothing contained in the Plan shall be construed to prevent the Company or any subsidiary from taking any corporate action that is deemed by the Company or such subsidiary to be appropriate or in its best interests, whether or not such action would have an adverse effect on the Plan or any Option made under the Plan. No optionee, beneficiary or other person shall have any claim against the Company or any subsidiary as a result of any such action.
(g) Limitations on Transfer. Except as designated by the optionee by will or by the laws of descent and distribution, neither an optionee nor an optionee's beneficiary shall have the power or right to sell, exchange, pledge, transfer, assign or otherwise encumber or dispose of such optionee's or beneficiary's interest arising under the Plan or any Option received under the Plan, nor shall such interest be subject to seizure for the payment of an Optionee's or beneficiary's debts, judgments, alimony, or separate maintenance or be transferable by operation of law in the event of an optionee's or beneficiary's bankruptcy or insolvency and to the extent any such interest arising under the Plan or an Option received under the Plan is awarded to a spouse pursuant to any divorce proceeding, such interest shall be deemed to be terminated and forfeited notwithstanding any vesting provisions or other terms herein or in the agreement evidencing such Option.
(h) Application of Funds. The proceeds received by the Company from the sale of shares of Stock pursuant to the Plan shall be used for general corporate purposes.
(i) Elections in Writing. Unless otherwise specified herein, each election required or permitted to be made by any optionee or other person entitled to benefits under the Plan, and any permitted modification, or revocation thereof, shall be in writing at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the Plan, as the Committee shall require.
(j) Governing Law; Construction. All rights and obligations under the Plan shall be governed by, and the Plan shall be construed in accordance with, the laws of the State of Missouri without regard to the principles of conflicts of laws. Titles and headings to Sections herein are for purposes of reference only, and shall in no way limit, define or otherwise affect the meaning or interpretation of any provisions of the Plan.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director Stock Option Plan
O'REILLY AUTOMOTIVE, INC. 2003 DIRECTOR STOCK OPTION PLAN
I. Establishment and Purpose.
O'Reilly Automotive, Inc. hereby establishes a stock option plan to be named the 2003 O'Reilly Automotive, Inc. Director Stock Option Plan. The purpose of the Plan is to provide (a) further inducement to qualified persons to become and remain Eligible Directors of the Company, and (b) additional incentive to Eligible Directors of the Company by encouraging them to acquire shares of Stock upon the exercise of Options granted hereunder in return for services rendered by them to the Company, thereby increasing such Eligible Directors' proprietary interest in the business of the Company; thereby furthering the interest of the Company and its shareholders.
II. Definitions.
(a) "Act" means the Securities and Exchange Act of 1934, as amended from time to time.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time.
(d) "Committee" means the Committee of the Board consisting of not less than two members of the Board as the Board may appoint.
(e) "Company" means O'Reilly Automotive, Inc., a corporation organized and existing under the laws of the State of Missouri.
(f) "Eligible Director" means a director of the Company who is not otherwise an officer or employee of the Company or of any subsidiary thereof.
(g) "Fair Market Value" of the Stock shall mean: (A) if the Stock is not publicly traded, the amount determined by the Committee on the date of the grant of the Option; (B) if the Stock is not traded on a securities exchange and not quoted on the NASDAQ, the closing quoted selling price of the Stock on the date of grant of the Option as quoted in "pink sheets" published by the National Daily Quotation Bureau; (C) if the Stock is not traded on a securities exchange but is quoted on the NASDAQ, the closing quoted selling price of the Stock on the date of grant of the Option, as reported by the Wall Street Journal; or (D) if the Stock is admitted to trading on a securities exchange, the closing quoted selling price of the Stock on the date of grant of the Option, as reported in the Wall Street Journal.
(h) "Option" means an option granted under this Plan to acquire Stock.
(i) "Optionee" means the person to whom an Option is granted.
(j) "Option Agreement" means an agreement issued to each Eligible Director with respect to each Option.
(k) "Option Date" means the date as of which an Option is granted, which shall be the first business day after the annual meeting of Shareholders of the Company.
(l) "NASDAQ" means the National Association of Securities Dealers Automated Quotation System.
(m) "Plan" means the 2003 O'Reilly Automotive, Inc. Director Stock Option Plan.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director Stock Option Plan (continued)
(n) "Post-Death Representative(s)" means the executor(s) or administrator(s) of the Optionee's estate or the person or persons to whom the Optionee's rights under his or her Option pass by the Optionee's will or the laws of the descent and distribution.
(o) "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Act, as amended from time to time, or any successor rule.
(p) "Stock" means authorized and unissued shares of $0.01 per value common stock of the Company or reacquired shares of such common stock held in its treasury.
III. Administration.
(a) The Plan shall be administered by the Committee. The members of the Committee shall be "Non-Employee Directors" within the meaning of Rule 16b-3 Act, provided, however, that noncompliance with such qualifications shall not invalidate any grants of Options by the Committee. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee, however caused, shall be filled by the Board. The Committee shall act by a majority of its members in office and the Committee may act either by vote at a telephonic or other meeting or by a consent or other written instrument signed by all of the members of the Committee. If the Committee does not exist, or for any other reason determined by the Board, the Board mat take any action under the Plan that would otherwise be the responsibility of the Committee.
(b) Subject to and not inconsistent with the express provisions of the Plan, the Committee has and may exercise such powers and authority of the Board as may be necessary or appropriate for the Committee to carry out its functions under the Plan. Without limiting the generality of the foregoing, the Committee shall have full power and authority (i) to determine all questions of fact that may arise under the Plan, (ii) to interpret the Plan and to make all other determinations necessary or advisable for the administration of the Plan and (iii) to prescribe, amend and rescind rules and regulations relating to the Plan, including, without limitation, any rules that the Committee determines are necessary or appropriate to ensure that the Company and the Plan will be able to comply with all applicable provisions of any applicable federal, state or local law. All interpretations, determinations and actions by the Committee will be final and binding upon all persons, including the Company, Eligible Directors and Optionees.
IV. Shares Subject to the Plan.
(a) Subject to the provisions of Section 10 hereof, the Stock which may be issued pursuant to the exercise of Options granted under the Plan shall not exceed in the aggregate 200,000 shares of Stock, plus all shares authorized under the 1993 Director Stock Option Plan not covered by an option on the date such plan expires.
(b) At any time during the existence of the Plan, there shall be reserved for issuance upon the exercise of Options granted under the Plan an amount of Stock (subject to adjustment as provided in Section 10 hereof) equal to the total number of share then issuable pursuant to all such Option grants which shall have been made prior to such time. The Company in its discretion may use reacquired shares held in the treasury in lieu of authorized but unissued shares.
(c) If an Option terminates, in whole or in part, by expiration or for any other reason except exercise of such Option, the shares previously reserved for issuance upon grant of the Option shall again be available for issuance as if such shares had never been subject to an Option.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director Stock Option Plan (continued)
V. Granting of Options.
(a) Each person who is an Eligible Director on the Option Date shall receive Options to acquire 10,000 shares of Stock at a per share purchase price equal to the per share Fair Market Value of the Stock on the Option Date, provided, however, that no grant shall be made to any Eligible Director who is first elected a director of the Company at the annual meeting of the shareholders immediately preceding the Board meeting on the Option Date.
(b) Each Eligible Director may also be granted Options from time to time upon approval by the full Board.
(c) All Options granted under the Plan shall be granted as of an Option Date. Promptly after each Option Date, the Company shall notify the Optionee of the grant of the Option, and shall hand deliver or mail to the Optionee an Option Agreement, duly executed by and on behalf of the Company, with the request that the Optionee execute and return the Option Agreement within thirty days after the Option Date. If the Optionee shall fail to execute and return the written Option Agreement within said thirty-day period, his or her Option shall be automatically terminated, except that if the Optionee dies within said thirty-day period, such Option Agreement shall be effective notwithstanding the fact that it has not been signed prior to death.
(d) Options granted under the Plan will not be incentive stock options within the meaning of Section 422 of the Code.
VI. Terms of Options.
Notwithstanding any other provision of the Plan, each Option shall be evidenced by an Option Agreement, which shall include the substance of the following terms and conditions:
(a) The option price for each share of Stock covered by an Option shall be an amount equal to 100% of the Fair Market Value of a share of Stock on the Option Date of such Option.
(b) The Option by its terms shall not be transferable by the Optionee otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or regulations thereunder. The designation of a beneficiary does not constitute a transfer. The Option shall be exercisable, during the Optionee's lifetime, only by the Optionee.
(c) The Option by its terms shall be immediately exercisable as to any or all shares and may be exercised at any time and from time to time.
(d) Each Option granted under the Plan and all unexercised rights thereunder shall expire automatically upon the earlier of (i) the date on which an Optionee ceases to hold office as a director of the Company for any reason other than retirement, death or disability, (ii) the date that is three months following the effective date of the Optionee's retirement from service on the Board, (iii) the date that is one year following the date on which the Optionee's service on the Board of Directors of the Company ceases due to death or disability, and (iv) the seventh anniversary date of the Option date.
VII. No Right to Remain a Director.
The grant of an Option shall not create any right in any person to remain as a director of the Company.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director Stock Option Plan (continued)
VIII. Exercise of Options.
(a) An Option may be exercised in whole or in part except as otherwise may be provided in the Option Agreement, by giving written notice to the Company stating the number of shares of Stock for which the Option is being exercised, accompanied by payment in full of the aggregate purchase price for the shares of Stock being purchased. Payment of the aggregate purchase price for the shares of Stock may be made (i) in cash or by check payable and acceptable to the Company for the full amount of the purchase price of the shares with respect to which the Option is exercised, (ii) subject to the approval of the Committee, upon delivery to the Company on the exercise date of certificates representing shares of Stock, owned by the Optionee for longer than six months and registered in the Optionee's name, having a Fair Market Value on the date of such exercise and delivery equal to the full amount of the purchase price of the shares with respect to which the Option is exercised, (iii) at the Optionee's written request and subject to the approval of the Committee and to such instructions as the Committee may specify, in accordance with a cashless exercise program pursuant to which the Company may deliver certificates for the shares of Stock for which the Option is being exercised to a broker for sale on behalf of the Optionee, provided that the Optionee has irrevocably instructed such broker to remit directly to the Company on the Optionee's behalf the full amount of such purchase price from the proceeds of such sale, or (iv) a combination of (i) and (ii) that collectively equals the full amount of the purchase price of the shares with respect to which the Option is exercised.
(b) An Optionee shall have none of the rights of a shareholder with respect to shares of Stock subject to his or her Option until shares of Stock are issued to him or her upon the exercise of his or her Option.
IX. General Provisions.
The Company shall not be required to issue or deliver any certificate for shares of Stock to an Optionee upon the exercise of his or her Option:
(a) Prior to (i) if requested by the Company, the filing with the Company by the Optionee or the Optionee's Post-Death Representative of a representation in writing that at the time of such exercise that it is his or her then present intention to acquire the shares of Stock being purchased for investment and not for resale, and/or (ii) the completion of any registration or other qualification of such shares of Stock under any state or federal securities laws or rulings or regulations of any governmental regulatory body which the Company shall determine to be necessary or advisable; and
(b) Unless such issuance or delivery would comply with all applicable laws and the applicable requirements of any securities exchange, the NASDAQ or similar entity.
X. Adjustment Provisions.
(a) The existence of the Plan and the Options granted hereunder shall not affect in any way the right or power of the Board or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company with or into another entity, any issuance of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Stock or the rights thereof, the dissolution or liquidation of the Company for any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director Stock Option Plan (continued)
(b) The shares with respect to which Options may be granted are shares of Stock as presently constituted. If, however, the number of outstanding shares of Stock are increased or decreased, or such shares are exchanged for a different number or kind of shares or securities of the Company through a reorganization, merger, recapitalization, reclassification, stock dividend, stock split, number of shares of Stock subject to the Plan as provided in Section 4 hereof, and the shares of Stock subject to issuance under outstanding Options under the Plan shall be appropriately and proportionately adjusted by the Committee. Any such adjustment in an outstanding Option shall be made without change in the aggregate purchase price applicable to the unexercised portion of the Option but with an appropriate adjustment in the price for each share or other unit of any security covered by the Option.
(c) Except as may otherwise be expressly provided in the Plan, the issuance by the Company of shares of capital stock of any class or securities convertible into shares of capital stock of any class for cash, property, labor or services, upon direct sale, upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares of capital stock or other securities, and in any case such shares of capital stock or other securities, and in any case whether or not for fair value, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Stock available under the Plan or subject to Options theretofore granted or the purchase price per share with respect to outstanding Options.
(d) Adjustments under this Section 10 be made by the Committee whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan or in connection with any such adjustment.
(e) Notwithstanding anything to the contrary contained in this Section 10, upon: (i) the dissolution or liquidation of the Company, (ii) a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, or (iii) a sale of substantially all of the assets of the Company, the Plan shall terminate, and any outstanding Options granted under the Plan shall terminate on the day before the consummation of the transaction; provided that the Committee shall have the right, but not the obligation, to accelerate the time in which any Options may be exercised prior to such a termination. However, the termination of such Options shall not occur if provision is made in writing in connection with the transaction, in a manner acceptable to the Committee, for: (A) the continuance of the Plan and assumption of outstanding Options, (B) the substitution for such Options of new options to purchase the stock of a successor corporation (or parent or subsidiary thereof), with appropriate adjustments as to number and kind of shares and option price, or (C) other treatment of the Options acceptable to the Committee. The Committee shall have the authority to amend this paragraph to provide for a requirement that a successor corporation assume any outstanding Options.
XI. Duration, Amendment and Termination.
(a) The Board may at any time terminate the Plan or make such amendments thereof as it shall deem advisable and in the best interests of the Company, without further action on the part of the shareholders of the Company; provided, however, that no such termination or amendment shall, without the consent of the Optionee, adversely affect or impair the rights of such Optionee, and provided further, that no amendment requiring shareholder approval in order to meet the requirements of Rule 16b-3 shall be effective unless such shareholder approval is obtained, and provided, further that the provisions relating to eligible persons, the amount and price of awards and the timing of awards may not be amended more than once every six months except to comport with changes in the Code or the Employee Retirement Income Security Act of 1974, or the rules thereunder. (b) The period during which Options may be granted under the Plan shall terminate on May 6, 2013, unless the Plan earlier shall have been terminated as provided above.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.30 - O'Reilly Automotive, Inc. 2003 Director Stock Option Plan (continued)
XII. Withholding.
The Company shall have the right to deduct from payments of any kind otherwise due to the Optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of Options under the Plan.
XIII. Shareholder Approval.
The Plan shall become effective upon adoption by the Board and approval by the Company's shareholders; provided, however, that prior to approval of the Plan by the Company's shareholders but after adoption by the Board, Options may be granted under the Plan subject to obtaining such approval.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.31 - O'Reilly Automotive, Inc. Corporate Governance/Nominating Committee Charter
O'REILLY AUTOMOTIVE, INC. CORPORATE GOVERNANCE/NOMINATING COMMITTEE CHARTER
Purpose
The Corporate Governance/Nominating Committee (the "Committee") of O'Reilly Automotive, Inc. (the "Company") is appointed by, and generally acts on behalf of, the Board of Directors of the Company (the "Board"). The Board has determined to establish the governing principles of the Committee through the adoption of this charter (the "Charter").
The Committee's principal purposes shall be: (1) to establish criteria for the selection of directors and to recommend to the Board the nominees for director in connection with the Company's annual meeting of stockholders; (2) to take a leadership role in shaping the Company's corporate governance policies and to issue and implement the Corporate Governance Principles of the Company; (3) to develop and coordinate annual evaluations of the Board, its committees and its members; and (4) to adhere to all legal standards required by the Securities and Exchange Commission (the "SEC") and the Nasdaq National Market ("Nasdaq").
Membership and Organization of Committee
The Committee shall be composed of three or more directors. Each member of the Committee shall meet the independence and experience requirements of the federal securities laws and the applicable rules and regulations of the SEC and Nasdaq, as such requirements may change from time to time.
The members of the Committee shall be appointed by the Board. The Board shall designate one member of the Committee to serve as Chairperson. If the Chairperson is absent from a meeting, another member of the Committee may act as Chairperson. Members of the Committee will be appointed for three-year terms and shall serve until their resignation, retirement, or removal by the Board or until their successors shall be appointed. The Board may fill vacancies on the Committee and remove a member of the Committee at any time with or without cause. No member of the Committee shall be removed except by majority vote of the independent directors of the Board then in office.
Responsibilities and Duties
The Committee shall:
Nomination of Directors
1. Consider and make recommendations to the Board concerning the appropriate size and overall characteristics of the Board, including desired competencies, skills and attributes and the desired ratio of independent and non-independent directors.
2. Establish criteria for persons to be nominated for election to the Board and its committees, taking into account the composition of the Board as a whole. At a minimum, the criteria should include (a) a candidate's qualification as "independent" under the federal securities laws and the rules and regulations of the SEC and Nasdaq applicable to the Board and each of its committees; (b) depth and breadth of experience within the Company's industry and otherwise; (c) outside time commitments; (d) special areas of expertise; (e) accounting and finance knowledge; (f) business judgment; (g) leadership ability; (h) experience in developing and assessing business strategies; (i) corporate governance expertise; (j) risk management skills; and (k) for incumbent members of the Board, the past performance of the incumbent director.
3. Conduct searches for prospective directors based on the foregoing criteria, review candidates recommended by stockholders, and evaluate and recommend candidates for election to the Board by the stockholders or to fill vacancies.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.31 - O'Reilly Automotive, Inc. Corporate Governance/Nominating Committee Charter (continued)
4. Review on an annual basis and recommend to the Board one member of the Board to serve as Lead Director.
5. Establish policies for reviewing the continued appropriateness of Board membership when an individual director changes the position he or she held when elected or appointed to the Board.
6. Evaluate and make recommendations to the Board concerning the appointment of directors to Board committees and the selection of committee chairs; recommendations shall consider suggestions from the Chairman of the Board, desired characteristics of committee members, specific legal and regulatory requirements, whether there should be a policy of periodic rotation of directors among the committees, the number of boards and other committees on which the directors serve, and whether there should be any limitations on the number of consecutive years a director should serve on any one committee.
7. Periodically review the independence of each director.
Corporate Governance Oversight
8. Periodically review and assess the adequacy of the Company's Corporate Governance Principles and recommend any changes to the Board for its approval and adoption.
9. Evaluate and recommend to the Board the responsibilities of the Board committees, including the structure, operations and the authority to delegate to subcommittees.
10. Assist the Board in its allocation of workload among the various committees of the Board.
11. Review and reassess the adequacy of the charters of the various committees of the Board periodically and recommend any proposed changes to the Board for its approval.
12. Assist the Board with development of responsibilities of directors, including basic duties and responsibilities with respect to attendance at board meetings and advance review of meeting materials.
13. Periodically review, consider and recommend to the Board the total compensation program for all non-employee directors of the Company for service on the Board and its committees.
14. Oversee the review and update, when appropriate, of the Company's Code of Business Conduct and Ethics.
15. Review any conflicts of interest or other issues that may arise under the Company's Code of Business Ethics involving the Company's officers or members of the Board.
16. Approve all service by senior executive officers on outside boards of directors.
17. Review and recommend adoption of all director and officer insurance policy requirements.
Board Evaluation and Development
18. Develop and coordinate an annual evaluation of the full Board, all Board committees and individual Board members, which evaluations shall be reported to the whole Board.
19. Establish and maintain an orientation program for new directors.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.31 - O'Reilly Automotive, Inc. Corporate Governance/Nominating Committee Charter (continued)
20. Develop, or make available, a continuing education program conducted either internally or externally for all directors.
Other Powers and Responsibilities
21. Make regular reports to the Board, providing an overview of its activities, summarizing Committee actions and commenting on the fulfillment of the Committee's duties under this Charter. The Committee shall also present resolutions to the Board that the Committee has recommended be adopted at the Board level.
22. Have the authority to retain consultants and other third-party advisors of its selection as it deems necessary to provide it with advice and counsel, including a search firm to fulfill its responsibilities of identifying candidates for Board membership. The Company shall provide appropriate funding for the Committee to retain such advisors without requiring the Committee to seek Board approval.
23. Review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for its approval.
24. Perform any other activities consistent with this Charter, the Company's Articles of Incorporation, Amended and Restated Bylaws, and governing law, as the Committee or the Board deems necessary or appropriate.
Conduct of Meetings
The Committee shall meet when, where and as often as it may deem necessary and appropriate in its judgment, but in no event less than four (4) times per year, either in person or telephonically. A majority of the members of the Committee shall constitute a quorum. The Chairman of the Board and Chief Executive Officer, the Chairman of the Committee, or the Company's Lead Director shall have the right to call a special meeting of the Committee. The Committee may request that any directors, officers or employees of the Company, or other persons whose advice and counsel are sought by the Committee, attend any meeting to provide such information as the Committee requests.
The Committee shall fix its own rules of procedure, which shall be consistent with the Amended and Restated Bylaws of the Company and this Charter. A member of the Committee or the Corporate Secretary shall keep written minutes of Committee meetings, which minutes shall be maintained with the books and records of the Company. The Committee may delegate authority to one or more members of the Committee when appropriate, but no such delegation shall be permitted if the authority is required by law, regulation or listing standard to be exercised by the Committee as a whole.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.32 - O'Reilly Automotive, Inc. Audit Committee Charter
O'REILLY AUTOMOTIVE, INC. AUDIT COMMITTEE CHARTER
Purpose
This Revised Audit Committee Charter (the "Charter") governs the operations of the Audit Committee of the Board of Directors (the "Audit Committee") of O'Reilly Automotive, Inc. (the "Company"). The Audit Committee is appointed by the Board to assist the Board in monitoring (1) the integrity of the financial statements of the Company, (2) the independent auditor's qualifications and independence, (3) the performance of the Company's internal audit function and independent auditors, and (4) the compliance by the Company with legal and regulatory requirements.
The Audit Committee shall prepare the report required by the rules of the Securities and Exchange Commission to be included in the Company's annual proxy statement.
Committee Membership
The Audit Committee shall consist of no fewer than three members. The members of the Audit Committee shall meet the independence, financial literacy and expertise and other qualification requirements of the federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the NASDAQ National Market. In addition, an Audit Committee member shall not own or control 20% or more of the Company's voting stock and shall be prohibited from receiving any consulting, advisory or other compensatory fee from the Company other than payment for Board or committee service.
The members of the Audit Committee shall be appointed by the Board on the recommendation of the Corporate Governance/Nominating Committee. Audit Committee members may be replaced by the Board. Committee Authority and Responsibilities
The Audit Committee shall have the sole authority to appoint or replace the independent auditor, and shall approve, in advance, all audit engagement fees and terms and all non-audit engagements with the independent auditors permitted under applicable law, rules and regulations. In addition, the Audit Committee shall approve all related party transactions. The Audit Committee may consult with management, but shall not delegate these responsibilities.
The Audit Committee shall have the authority, to the extent it deems necessary or appropriate, to retain special legal, accounting or other consultants to advise the Committee. The Audit Committee may request any officer or employee of the Company or the Company's outside counsel or independent auditor to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee. The Audit Committee shall establish procedures for the receipt, retention and treatment of complaints regarding the Company's accounting, financial reporting, internal accounting controls and auditing matters. The Audit Committee shall also establish procedures for the confidential, anonymous submission by the Company's employees regarding questionable accounting or auditing matters. The Audit Committee may form and delegate authority to subcommittees when appropriate.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.32 - O'Reilly Automotive, Inc. Audit Committee Charter (continued)
The Audit Committee shall meet as often as it determines, but not less frequently than quarterly. The Audit Committee shall meet with management, the internal auditors and the independent auditor in separate executive sessions at least quarterly. The Audit Committee may also, to the extent it deems necessary or appropriate, meet with the Company's investment bankers or financial analysts who follow the Company. The Audit Committee shall make regular reports to the Board and shall annually review its own performance.
The Audit Committee, to the extent it deems necessary or appropriate, shall:
Financial Statement and Disclosure Matters
1. Review and discuss with management and the independent auditor the annual audited financial statements, including disclosures made in management's discussion and analysis, and recommend to the Board whether the audited financial statements should be included in the Company's Annual Report on Form 10-K.
2. Review and discuss with management and the independent auditor the Company's quarterly financial statements prior to the filing of its Quarterly Reports on Form 10-Q, including the results of the independent auditors' reviews of the quarterly financial statements.
3. Discuss with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of the Company's financial statements, including any significant changes in the Company's selection or application of accounting principles, any major issues as to the adequacy of the Company's internal controls, the development, selection and disclosure of critical accounting estimates, and analyses of the effect of alternative assumptions, estimates or GAAP methods on the Company's financial statements.
4. Discuss with management the Company's earnings press releases, including the use of "pro forma" or "adjusted" non-GAAP information, as well as financial information and earnings guidance provided to analysts and rating agencies.
5. Discuss with management and the independent auditor the effect of regulatory and accounting initiatives as well as off-balance sheet structures on the Company's financial statements.
6. Discuss with management the Company's major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Company's risk assessment and risk management policies.
7. Discuss with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit. In particular, discuss:
(a) The adoption of, or changes to, the Company's significant auditing and accounting principles and practices as suggested by the independent auditor, internal auditors or management.
(b) The management letter provided by the independent auditor and the Company's response to that letter.
(c) Any difficulties encountered in the course of the audit work, including any restrictions on the scope of activities or access to requested information, and any significant disagreements with management. Oversight of the Company's Relationship with the Independent Auditor
8. Review the experience and qualifications of the senior members of the independent auditor team.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.32 - O'Reilly Automotive, Inc. Audit Committee Charter (continued)
9. Obtain and review a formal, written report from the independent auditor at least annually regarding (a) the auditor's internal quality-control procedures, (b) any material issues raised by the most recent quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or more independent audits carried out by the firm, (c) any steps taken to deal with any such issues, and (d) all relationships between the independent auditor and the Company (consistent with auditor professional responsibility standards, I.S.B. No. 1). Evaluate the qualifications, performance and independence of the independent auditor, including considering whether the auditor's quality controls are adequate and the provision of non-audit services is compatible with maintaining the auditor's independence, and taking into account the opinions of management and the internal auditor. The Audit Committee shall present its conclusions to the Board and, if so determined by the Audit Committee, recommend that the Board take additional action to satisfy itself of the qualifications, performance and independence of the auditor.
10. Require the rotation of the lead audit partner and the concurring audit partner every five years in order to assure continuing auditor independence. The Audit Committee shall consider whether it is appropriate to adopt a policy of rotating the independent auditing firm itself on a regular basis.
11. Recommend to the Board policies for the Company's hiring of employees or former employees of the independent auditor who were engaged on the Company's account. The Audit Committee shall require a one year "cooling off" period before a member of the independent auditor team can begin working for the Company in certain key positions such as chief executive officer, controller, chief financial officer, chief accounting officer or any equivalent position.
12. Discuss with the national office of the independent auditor issues on which they were consulted by the Company's audit team and matters of audit quality and consistency.
13. Meet with the independent auditor prior to the audit to discuss the planning and staffing of the audit. Oversight of the Company's Internal Audit Function
14. Review the appointment and replacement of the senior internal auditing executive.
15. Review the significant reports to management prepared by the internal auditing department and management's responses.
16. Discuss with the independent auditor the internal audit department responsibilities, budget and staffing and any recommended changes in the planned scope of the internal audit. Compliance Oversight Responsibilities
17. Obtain from the independent auditor assurance that Section 10A of the Securities Exchange Act of 1934 has not been implicated.
18. Obtain reports from management, the Company's senior internal auditing executive and the independent auditor that the Company is in conformity with applicable legal requirements and the Company's Code of Business Conduct and Ethics. Review reports and disclosures of insider and affiliated party transactions. Advise the Board with respect to the Company's policies and procedures regarding compliance with applicable laws and regulations and with the Company's Code of Business Conduct and Ethics.
19. Discuss with management and the independent auditor any correspondence with regulators or governmental agencies and any employee complaints or published reports which raise material issues regarding the Company's financial statements or accounting policies.
20. Discuss with the Company's General Counsel legal matters that may have a material impact on the financial statements or the Company's compliance policies.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.32 - O'Reilly Automotive, Inc. Audit Committee Charter (continued)
Periodic Review of Charter
The Audit Committee, with the assistance of counsel and/or the Company's independent accountants, shall reassess the adequacy of its Charter at least annually to ensure consistency with changing needs and compliance with all legal and regulatory requirements, and recommend any proposed changes to the Board for approval.
Limitation of Audit Committee's Role
While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company's financial statements and disclosures are complete and accurate and are in accordance with generally accepted accounting principles and applicable rules and regulations. These are the responsibilities of management and the independent auditor.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.33 - O'Reilly Automotive, Inc. Compensation Committee Charter
O'REILLY AUTOMOTIVE, INC. COMPENSATION COMMITTEE CHARTER
Purpose
The Compensation Committee (the "Committee") of O'Reilly Automotive, Inc. (the "Company") is appointed by, and generally acts on behalf of, the Board of Directors of the Company (the "Board"). The Board has determined to establish the governing principles of the Committee through the adoption of this charter (the "Charter").
The Compensation Committee's principal purposes shall be: (1) to discharge the Board's responsibilities relating to compensation of the Company's executives; (2) to produce an annual report on executive compensation for inclusion in the Company's proxy statement; and (3) to oversee and advise the Board on the adoption of policies that govern the Company's compensation programs, including stock and benefit plans.
Membership
The Committee shall be composed of three or more directors. Each member of the Committee shall meet the independence and experience requirements of the federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission ("SEC") and the Nasdaq National Market ("Nasdaq"), as such requirements may change from time to time.
The members of the Committee shall be appointed by the Board. The Board shall designate one member of the Committee to serve as Chairperson. If the Chairperson is absent from a meeting, another member of the Committee may act as Chairperson. Members of the Committee will be appointed for three-year terms and shall serve until their resignation, retirement, or removal by the Board or until their successors shall be appointed. The Board may fill vacancies on the Committee and remove a member of the Committee at any time with or without cause. No member of the Committee shall be removed except by majority vote of the independent directors of the Board then in office, provided that a member that no longer serves as a director of the Company shall be deemed automatically removed without any further action by the Board.
Authority
The Committee will have the resources and authority necessary to discharge its duties and responsibilities, including the authority to retain outside counsel or other experts or consultants, as it deems appropriate. Any communications between the Committee and legal counsel in the course of obtaining legal advice will be considered privileged communications of the Company and the Committee will take all necessary steps to preserve the privileged nature of those communications.
Responsibilities and Duties
Subject to the provisions of the Company's Corporate Governance Principles, the principal responsibilities and functions of the Compensation Committee are as follows:
1. Review the competitiveness of the Company's executive compensation programs to ensure (a) the attraction and retention of corporate officers, (b) the motivation of corporate officers to achieve the Company's business objectives, and (c) to align the interest of key leadership with the long-term interests of the Company's shareholders.
2. Review trends in management compensation, oversee the development of new compensation plans and, when necessary, approve the revision of existing plans.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.33 - O'Reilly Automotive, Inc. Compensation Committee Charter (continued)
3. Review the performance of executive management other than the Chief Executive Officer, who will be reviewed by the Corporate Governance/Nominating Committee.
4. Review and approve the goals and objectives of the Chairman and Chief Executive Officer, evaluate the performance of the Chairman and Chief Executive Officer in light of these corporate objectives, and set the compensation level of the Chairman and Chief Executive Officer consistent with Company philosophy.
5. Approve the salaries, bonus and other compensation for all corporate officers.
6. Review and approve compensation packages for new corporate officers and termination packages for corporate officers as requested by management.
7. Review and approve the awards made under any executive officer bonus plan, and provide an appropriate report to the Board.
8. Review and discuss with the Board and senior officers plans for officer development and corporate succession plans for the Chief Executive Officer and other senior officers.
9. Review and make recommendations concerning long-term incentive compensation plans, including the use of stock options and other equity-based plans. Except as otherwise delegated by the Board, the Committee will act on behalf of the Board as the "Committee" established to administer equity-based and employee benefit plans, and as such will discharge any responsibilities imposed on the Committee under those plans, including making and authorizing grants, in accordance with the terms of those plans.
10. Review periodic reports from management on matters relating to the Company's personnel appointments and practices.
11. Produce an annual Compensation Committee Report for the Company's annual proxy statement in compliance with federal securities laws and the applicable rules and regulations of the SEC and Nasdaq.
12. Annually evaluate the Committee's performance and this Charter.
Conduct of Meetings
The Committee shall meet when, where and as often as it may deem necessary and appropriate in its judgment, but in no event less than four (4) times per year, either in person or telephonically. A majority of the members of the Committee shall constitute a quorum. The Chairman of the Board and Chief Executive Officer, the Chairman of the Committee, or the Company's Lead Director shall have the right to call a special meeting of the Committee. The Committee may request that any directors, officers or employees of the Company, or other persons whose advice and counsel are sought by the Committee, attend any meeting to provide such information as the Committee requests.
The Committee shall fix its own rules of procedure, which shall be consistent with the Amended and Restated Bylaws of the Company and this Charter. A member of the Committee or the Corporate Secretary shall keep written minutes of Committee meetings, which minutes shall be maintained with the books and records of the Company. The Committee may delegate authority to one or more members of the Committee when appropriate, but no such delegation shall be permitted if the authority is required by law, regulation or listing standard to be exercised by the Committee as a whole.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.34 - O'Reilly Automotive, Inc. Code of Business Conduct and Ethics
Code of Business Conduct and Ethics
This Code of Business Conduct and Ethics (this "Code") provides a general statement of the Company's expectations regarding the ethical standards that each director, officer and team member should adhere to while acting on behalf of the Company. This Code contains compliance standards and procedures to facilitate its effectiveness and to ensure a prompt and consistent response to violations. Each director, officer, and team member is required to read and become familiar with the ethical standards described in this Code. It is not intended to and does not in any way constitute an employment contract or assurance of continued employment, and does not create any rights in any director, officer, team member, client, supplier, competitor, stockholder or any other person or entity.
The highest business and ethical standards mandate accountability for adherence to this Code. Accordingly, any conduct or action that violates this Code will be subject to disciplinary action, which may include immediate termination
Administration
The Corporate Governance/Nominating Committee of the Board of Directors of O'Reilly Automotive, Inc. (the "Company"), referred to in this Code as the Governing Body, is responsible for setting the standards of business conduct contained in this Code and updating these standards as it deems appropriate to reflect changes in the legal and regulatory framework applicable to the Company, the business practices within the Company's industry, the Company's own business practices, and the prevailing ethical standards of the communities in which the Company operates. The Company's Internal Auditor will act as the Compliance Officer and will oversee the procedures designed to implement this Code to ensure that they are operating effectively. It is the individual responsibility of each director, officer and team member of the Company to comply with this Code.
Conflicts of Interest
All directors, officers and team members of the Company should be diligent in avoiding a conflict of interest with regard to Company's interests. A conflict of interest exists when there is a conflict (or even an appearance of conflict) between an individual's personal interests, financial or otherwise, or professional interests, and his or her fiduciary obligations to the Company. A conflict situation can arise when a director, officer or team member takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise when a director, officer or team member, or a member of his or her family, receives improper personal benefits as a result of his or her position in the Company, whether received from the Company or third party. Federal law prohibits loans by the Company to its directors and executive officers. It is a conflict of interest for a Company team member to work simultaneously for a competitor, customer, or supplier. In addition, directors, officers and team members are not allowed to work for a competitor as a consultant or board member.
Conflicts of interest are prohibited as a matter of Company policy, except under guidelines approved by the Corporate Governance/Nominating Committee of the Board of Directors. Where there is an actual or potential conflict of interest or perception of a conflict of interest, the director, officer or team member must make full disclosure and must not participate in the matter giving rise to the conflict. Such person may, in accordance with such procedures, refrain or be asked to refrain from participating and/or making decisions concerning any business that is related to the matter in which there is an actual or potential conflict of interest.
Any director, officer or team member who becomes aware of a conflict of interest or potential conflict of interest should bring it to the attention of the Compliance Officer, a supervisor, manager or other appropriate personnel or consult the procedures discussed in this Code. Directors, officers and team members who knowingly fail to disclose conflicts of interest are subject to disciplinary action, including dismissal or removal from office.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.34 - O'Reilly Automotive, Inc. Code of Business Conduct and Ethics (continued)
Corporate Opportunities
No director, officer or team member may: (a) take for himself or herself personally opportunities that are discovered through the use of Company property, information or position; (b) use Company property, information or position for personal gain; or (c) compete with the Company. Directors, officers and team members owe a duty of loyalty to the Company, and must be committed to advance its legitimate interests when the opportunity to do so arises.
Confidentiality (Protecting Company Information)
All directors, officers and team members must maintain the confidentiality of confidential information entrusted to them by the Company, its business partners, suppliers, customers or others related to the Company's business. Confidential information includes all non-public information that might be of use to competitors or harmful to the Company, or its customers, if disclosed. Typical of such information are business, research, and new product plans; objectives and strategies; trade secrets; unpublished financial or pricing information; processes and formulas; computer programs; salary and benefits data; team member medical information; team member, customer, and supplier lists. Disclosure of confidential information violates Company policy and could result in disciplinary action, except when authorized by legal counsel as required by laws, regulations or legal proceedings. If any director, officer or team member believes they have a legal obligation to disclose confidential information, they should consult the Company's legal counsel.
Any Company information created in the course of employment belongs to the Company. Team members leaving the Company must return all written proprietary information in their possession. A team member's obligation to protect the Company's proprietary and confidential information continues even after he or she leaves the Company.
Protection and Proper Use of Company Assets
Safeguarding Company assets is the responsibility of all directors, officers and team members. All directors, officers and team members should protect the Company's assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the Company's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation to the Compliance Officer. All Company assets should be used for legitimate business purposes. The personal use of Company assets without permission is prohibited.
Fair Dealing
The Company considers its reputation for integrity and fairness one of its most valuable assets. Each director, officer and team member shall endeavor to deal fairly and in good faith with the Company's customers, stockholders, team members, suppliers, regulators, business partners, competitors and others. We seek to outperform our competition fairly and honestly. We seek competitive advantages through superior performance, never through unethical or illegal business practices. No director, officer or team member shall take unfair advantage of anyone through manipulation, concealment, abuse of privileged or confidential information, misrepresentation, fraudulent behavior, possessing trade secret information that was obtained without the owner's consent or through any other unfair dealing practice. No actions shall be taken by any Company director, officer or team member, which could undermine proper relationships or tarnish the Company's reputation or integrity.
Occasionally our customers or suppliers may offer gifts to team members. Such gifts are known as "gratuities" and are generally offered as a means of influencing a team member's business conduct in some way or influencing his or her opinion/ relationship with them as a supplier. Our definition of gratuities includes, but is not limited to, items for personal use such as money, gifts, merchandise, trips, sporting event tickets, meals, etc.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.34 - O'Reilly Automotive, Inc. Code of Business Conduct and Ethics (continued)
The Company realizes that during the normal course of business it may be customary to accept business-related items of incidental value ($20 or less). We have therefore defined acceptable and unacceptable behavior when dealing with gratuities as follows: Acceptable - Promotional items and gifts such as ink pens, caps, calendars, hats, an occasional business related meal, etc., all of approximate value of $20 or less.
Unacceptable - money, apparel, gifts, merchandise, trips, sporting event tickets, golf outings, meals including spouse, social meals, etc., with a value of more than $20. In the event a gratuity is offered by a supplier which is categorized as unacceptable, the information concerning the gratuity should be reported according to the Compliance Procedures detailed in this Code.
If it is determined the gratuity can be used to benefit our business, the gratuity will be accepted and used according to normal company procedure. No gratuity categorized as unacceptable shall be accepted prior to approval of the Compliance Officer or the Governing Body.
Sample merchandise obtained for product evaluation during the normal course of business should be sold as inventory when the evaluation is complete. This would also apply to premium items. At no time is it acceptable to request specific application samples for personal use. New products or materials needing to be "tested" on a personal vehicle must be approved according to the above procedures and coordinated by a product manager. The results should be reported to the Product Review Board.
All gratuities must be reported. At the end of each month during which a gratuity of any type is accepted, it is the responsibility of the team member accepting the gratuity to complete a Gratuities Report. The completed form should be sent to the Compliance Officer.
Failure to abide by this policy is grounds for disciplinary action up to and including termination.
The U.S. Foreign Corrupt Practices Act prohibits giving anything of value directly or indirectly to officials of foreign governments or foreign political candidates in order to obtain or retain business. In addition, the promise, offer or delivery to an official or team member of the U.S. Government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules. Please consult the Compliance Officer to obtain guidance from Company legal counsel in this area. The Board shall have an independent director designated as the Lead Independent Director, who shall preside at the executive sessions of the independent directors and shall be responsible for coordinating the activities of the other independent directors. The Lead Independent Director shall have such other authority, responsibilities and duties as determined by the Board.
Compliance with Laws, Rules, and Regulations
The Company expects all directors, officers and team members of the Company to comply in all respects with the laws and regulations that apply to its business at all government levels. In addition, the Company requires that its directors, officers and team members comply with work-place policies and applicable laws and regulations. Although not all team members are expected to know details of all laws, it is important to recognize when to seek advice from supervisors.
This Code does not summarize all laws, rules and regulations applicable to the Company and its directors, officers and team members. Please consult the Compliance Officer for various guidelines the Company has prepared on specific laws, rules and regulations, or to obtain further guidance from the Company's legal counsel.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.34 - O'Reilly Automotive, Inc. Code of Business Conduct and Ethics (continued)
Accurate and Timely Periodic Reports
The Company is committed to providing investors with full, fair, accurate, timely and understandable disclosure in the periodic reports that it is required to file with, or submit to, the Securities Exchange Commission (the "SEC") and in other public communications made by the Company as a public company. To this end, the Company shall:
- - Comply with generally accepted accounting principles at all times;
- - Maintain a system of internal accounting controls that will provide reasonable assurances to management that all transactions are properly recorded;
- - Maintains books and records that accurately reflect and fairly reflect the Company's transactions;
- - Prohibit the establishment of any undisclosed or unrecorded funds or assets;
- - Maintain a system of internal controls that will provide reasonable assurances to management that material information about the Company is made known to management, particularly during the periods in which the Company's periodic reports are being prepared; and
- - Present information in a clear and orderly manner and avoid the use of legal and financial jargon in the Company's periodic reports.
No action may be taken by any director or officer (or other person acting under the direction thereof) to fraudulently influence, coerce, manipulate or mislead the Company's independent auditor for the purpose of rendering the Company's financial statements materially misleading
The Company considers its disclosure obligation to be of critical importance. Depending on his or her position with the Company, a director, officer or team member may be asked to provide necessary information to assure that the Company's public reports are complete, fair and understandable. The Company takes it's public reporting very seriously and expects its directors, officers and team members to provide prompt answers to inquiries by it related to public disclosure requirements.
Accounting Complaints
The Company's policy is to comply with all applicable financial reporting and accounting regulations applicable to the Company. If any director, officer or team member of the Company has concerns or complaints regarding questionable accounting or auditing matters of the Company, then he or she is encouraged to submit those concerns or complaints (anonymously, confidentially or otherwise) to the Audit Committee of the Board of Directors (which will, subject to its duties arising under applicable law, regulations and legal proceedings, treat such submissions confidentially) according to the procedures established by the Audit Committee. Such submissions may be directed to the attention of the Compliance Officer, the Audit Committee or any director who is a member of the Audit Committee, at the principal executive offices of the Company.
Insider Trading
Directors, officers and team members who have access to confidential information are not permitted to use or share that information for stock trading purposes for any other purpose except in the conduct of our business and in strict compliance with all applicable laws and SEC regulations. All non-public information about the Company should be considered confidential information. To use non-public information for personal financial benefit or to "tip" others who might make an investment decision on the basis of this information is not only unethical but also illegal. No director, officer, or team member of the Company may buy or sell securities of the Company when in possession of "material non-public information." Directors, officers and team members are required to comply with the Company's Insider Trading Policy, copies of which are distributed to all directors, officers and team members and are available from the Compliance Officer.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.34 - O'Reilly Automotive, Inc. Code of Business Conduct and Ethics (continued)
Records Retention; Books and Accounts
Directors, officers and team members are expected to become familiar with the Company's policies on record retention. All of the Company's books, records, accounts and financial statements must be maintained in reasonable detail to appropriately reflect the Company's transactions and must conform both to applicable legal requirements and to the Company's system of internal controls. Unrecorded or "off the books" funds or assets, i.e. "off the balance sheet" transactions, should not be maintained unless permitted by applicable law or regulation
The Company requires honest and accurate recording and reporting of information in order to make responsible business decisions. For example, only true and actual numbers of hours worked should be reported. Many team members regularly use business expense accounts, which must be documented and recorded accurately.
Records should always be retained or destroyed according to the Company's record retention policies.
Reporting of Illegal or Unethical Behavior
The Company's business and reputation depends, in large measure, on strict adherence to the provisions of this Code. Every director, officer and team member is encouraged and obligated to report any known or suspected Code violations to the Governing Body, supervisors, managers or other appropriate counsel.
The Company will investigate any matter so reported and may take appropriate disciplinary and corrective action, up to and including termination. The Company forbids retaliation of any kind against team members who report violations of this Code or other illegal or unethical conduct.
Compliance Procedures
Directors, officers and team members who are concerned that violations of this Code or that other illegal or unethical conduct by directors, officers or team members of the Company have occurred or may occur should contact their supervisor. If for any reason, anyone is unable to approach their supervisor about their concerns or complaints, then they may contact either the Compliance Officer or any member of the Corporate Governance/Nominating Committee. All reports of concerns or complaints shall remain confidential to the extent necessary, subject to applicable law, regulation or legal proceeding.
Waivers
The provisions of this Code may be waived for directors or executive officers only by a resolution of the Company's independent directors. The provisions of this Code may be waived for team members who are not directors or executive officers by the Compliance Officer. Any waiver of this Code granted to a director or executive officer will be publicly disclosed as required by the federal securities laws and the applicable rules and regulations of the SEC or the securities exchange or association on which the Company's securities are listed for trading.
Political Contribution
Directors, officers and team members are free to contribute to candidates or otherwise partake in the political process in their individual capacity. All team members must avoid discussing with [decision-makers] any matters pending before courts or agencies affecting the Company unless the team member is part of the Company's legal counsel or obtains the written authorization of the Company to do so.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 10.34 - O'Reilly Automotive, Inc. Code of Business Conduct and Ethics (continued)
The Company is committed to maintaining goodwill and to being a good civic neighbor. Directors, officers and team members are encouraged to serve on boards of non-profit organizations and in other volunteer capacities. However, if a director, officer or team member serves in any capacity with a non-profit organization, such person may not represent either the Company or the organization in any transaction between them.
No Company funds or assets will be loaned or contributed to any political party or organization, or to any individual who holds or is a candidate for public office, except when permitted by applicable law and prior written authorization is obtained from the Company. The following are examples of activities, which are illegal under federal law and the laws of those states, which prohibit corporate political contributions:
- - Contributions by a team member which are reimbursed by Company through expense accounts or in other ways;
- - Purchase by Company of tickets for political dinners or fundraising events;
- - Contributions in kind, such as loaning team members to political parties or providing company airplanes for use in political campaigns;
- - Indirect contributions by Company through suppliers, customers or agents.
Political contributions by corporations are permitted by the laws of some states and foreign countries. Such allowable contributions may include some of the activities mentioned above, but in all cases, require prior authorization of the Compliance Officer and, when required by the law, by the Governing Body.
This policy is not intended to discourage or prevent a team member from engaging in political activities as an individual on his or her own time and at his or her own expense. It also does not prohibit the team member from making political contributions from personal funds or from expressing individual views with respect to legislative or political matters.
Other Company Policies
All directors and team members should be familiar with the Company's existing Insider Trading Policy and other policies regarding the rights and obligations of the Company's team members, which may amplify and expand on certain matters addressed in this Code.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Selected Consolidated Financial Data (continued)
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition, results of operations and liquidity and capital resources should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this annual report.
We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both do-it-yourself (DIY) customers and professional installers. Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items and accessories, and a complete line of auto body paint and related materials, automotive tools and professional service equipment.
We calculate same-store product sales based on the change in product sales for stores open at least one year. Prior to January 2000, we calculated same-store product sales based on the change in product sales of only those stores open during both full periods being compared. We calculate the percentage increase in same-store product sales based on store sales results, which exclude sales of specialty machinery, sales by outside salesmen and sales to employees.
Cost of goods sold consists primarily of product costs and warehouse and distribution expenses. Cost of goods sold as a percentage of product sales may be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs.
Operating, selling, general and administrative expenses consist primarily of salaries and benefits for store and corporate team members, occupancy, advertising expenses, general and administrative expenses, data processing, professional expenses and other related expenses.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend the business activities of our company. To aid in that understanding, management has identified our "critical accounting policies." These policies have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.
o Cost of goods sold - Cost of goods sold includes warehouse and distribution expenses and estimates of amounts due from vendors for certain merchandise allowances and rebates. These estimates are consistent with historical experience.
o Operating, selling, general and administrative expense (OSG&A) - Operating, selling, general and administrative expense includes estimates for medical, worker's compensation and other general liability obligations, which are partially based on estimates of certain claim costs and historical experience.
o Accounts receivable - Allowance for doubtful accounts is estimated based on historical loss ratios and consistently has been within management's expectations.
o Revenue - Over-the-counter retail sales are recorded when the customer takes possession of merchandise. Sales to professional installers, also referred to as "commercial sales", are recorded upon delivery of merchandise to the customer, generally at the customer's place of business. Wholesale sales to other retailers, also referred to as "jobber sales" are recorded upon shipment of merchandise. All sales are recorded net of estimated allowances and discounts.
o Vendor concessions - The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative advertising, devaluation programs, allowances for warranties and volume purchase rebates. Co-operative advertising allowances that are incremental to our advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period in which the advertising occurred. All other vendor concessions are recognized as a reduction of cost of sales when recognized in the consolidated statement of income.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
o Stock-based compensation - We have elected to use the intrinsic value method of accounting for stock options issued under our stock option plans and accordingly do not record an expense for such stock options. For purposes of pro forma disclosures under the fair value method, the estimated fair value of the options is amortized to expense over the options' vesting period. Our pro forma information for the years ended December 31, is as follows:
Results of Operations
The following table sets forth, certain income statement data as a percentage of product sales for the years indicated:
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2003 Compared to 2002
Product sales increased $199.3 million, or 15.2% from $1.31 billion in 2002 to $1.51 billion in 2003, primarily due to 128 net additional stores opened during 2003, and a 7.8% increase in same-store product sales for stores open at least one year. We believe that the increased product sales achieved by the existing stores are the result of our offering of a broader selection of products in most stores, an increased promotional and advertising effort through a variety of media and localized promotional events, and continued improvement in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to increased product sales.
Gross profit increased 15.4% from $553.4 million (42.2% of product sales) in 2002 to $638.3 million (42.2% of product sales) in 2003. The increase in gross profit dollars is due to the increase in product sales.
Operating, selling, general and administrative expenses (OSG&A) increased $58.0 million from $415.1 million (31.6% of product sales) in 2002 to $473.1 million (31.3% of product sales) in 2003. The increase in these expenses in dollar amount was primarily attributable to increased salaries and benefits, rent and other costs associated with the addition of employees and facilities to support the increased level of our operations. The decrease in OSG&A expenses as a percent of product sales was primarily due to achieving greater economies of scale resulting from increased product sales and through management's expense control initiatives.
Other expense, net, decreased by $2.1 million from $7.3 million in 2002 to $5.2 million in 2003. The decrease was primarily due to a reduction in interest expense as a result of lower average borrowings under the Company's credit facility and to a lesser extent lower average interest rates.
Provision for income taxes increased from $49.0 million in 2002 (37.4% effective tax rate) to $60.0 million in 2003 (37.5% effective tax rate). The increase in the dollar amount was primarily due to the increase of income before income taxes.
Principally as a result of the foregoing, net income in 2003 was $100.1 million (6.6% of product sales), an increase of $18.1 million or 22.1%, from net income in 2002 of $82.0 million (6.3% of product sales).
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
2002 Compared to 2001
Product sales increased $220.4 million, or 20.2% from $1.09 billion in 2001 to $1.31 billion in 2002, due to 106 net additional stores opened during 2002, and a 3.7% increase in same-store product sales for stores open at least one year. We believe that the increased product sales achieved by the existing stores are the result of our offering of a broader selection of products in most stores, an increased promotional and advertising effort through a variety of media and localized promotional events, and continued improvement in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to increased product sales.
Gross profit increased 18.3% from $467.8 million (42.8% of product sales) in 2001 to $553.4 million (42.2% of product sales) in 2002. The increase in gross profit dollars is primarily due to increases in sales. The decrease in gross profit as a percent of product sales is primarily due to increased product sales to independent jobbers, which are at a lower gross margin, and increased distribution costs at the distribution centers acquired from Mid-State Automotive Distributors, Inc.
Operating, selling, general and administrative expenses increased $61.1 million from $354.0 million (32.4% of product sales) in 2001 to $415.1 million (31.6% of product sales) in 2002. The increase in these expenses in dollar amount was primarily attributable to increased salaries and benefits, rent and other costs associated with the addition of employees and facilities to support the increased level of our operations. The decrease in OSG&A expenses as a percent of product sales was primarily due to reductions in payroll, benefits and other OSG&A expenses through management's expense control initiatives.
Other expense, net, increased by $215,000 from $7.1 million in 2001 to $7.3 million in 2002. The increase was primarily due to interest expense on increased borrowings under our credit facility and a decrease in interest income.
Provision for income taxes increased from $40.4 million in 2001 (37.8% effective tax rate) to $49.0 million in 2002 (37.4% effective tax rate). The increase in the dollar amount was primarily due to the increase of income before income taxes. The decrease in the effective rate was primarily due to changes in the mix of business between the states in which we operate.
Principally as a result of the foregoing, net income in 2002 was $82.0 million (6.3% of product sales), an increase of $15.6 million or 23.6%, from net income in 2001 of $66.4 million (6.1% of product sales).
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
Net cash provided by operating activities was $172.8 million in 2003, $104.5 million in 2002 and $50.0 million in 2001. The increase in cash provided by operating activities in 2003 compared to 2002 was primarily due to increases in net income, accounts payable, accrued payroll, accrued benefits and withholdings, partially offset by increases in receivables and inventory. The increase in accounts payable was primarily due to management's efforts with vendors to extend the terms of payment. The increases in accrued payroll, benefits and withholdings, accounts receivable and inventory primarily relate to the increased level of our operations.
The increase in cash provided by operating activities in 2002 compared to 2001 was primarily due to increases in net income, accounts payable, income taxes payable, accrued payroll and accrued benefits and withholdings, partially offset by increases in receivables and inventory. These increases relate primarily to the increased level of our operations.
Net cash used in investing activities was $134.6 million in 2003, $105.4 million in 2002 and $77.8 million in 2001. The increase in cash used in investing activities in 2003 and 2002 was primarily due to increased purchases of property and equipment.
On December 29, 2000, we completed a sale-leaseback transaction. Under the terms of the transaction, we sold 90 properties, including land, buildings and improvements, which generated $52.3 million of additional cash. The lease, which is being accounted for as an operating lease, provides for an initial lease term of 21 years and may be extended for one initial ten-year period and two additional successive periods of five years each. The resulting gain of $4.5 million has been deferred and is being amortized over the initial lease term. Net rent expense during the initial term will be approximately $5.5 million annually and is included in the table of contractual obligations under non-cancelable operating leases.
On May 16, 2001, we completed a $100 million private placement of two series of unsecured senior notes (Senior Notes). The Series 2001-A Senior Notes were issued for $75 million, are due May 16, 2006, and bear interest at 7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are due May 16, 2008, and bear interest at 7.92% per year. The private placement agreement allows for a total of $200 million of Senior Notes issuable in series and is guaranteed by all of our subsidiaries. Proceeds from the transaction were used to reduce outstanding borrowings under our former revolving credit facility.
In August 2001, we completed a sale-leaseback with O'Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company). The transaction involved the sale and leaseback of nine O'Reilly Auto Parts stores and resulted in approximately $5.6 million of additional cash to the Company. The transaction did not result in a material gain or loss. The lease, which has been accounted for as an operating lease, calls for an initial term of 15 years with three five-year renewal options.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
On June 26, 2003, we completed an amended and restated master agreement to our $50 million Synthetic Operating Lease Facility (the Facility or the Synthetic Lease) with a group of financial institutions. The terms of the Facility provide for an initial lease period of five years, a residual value guarantee of approximately $44.2 million at December 31, 2003, and purchase options on the properties. The Facility also contains a provision for an event of default whereby the lessor, among other things, may require us to purchase any or all of the properties. One additional renewal period of five years may be requested from the lessor, although the lessor is not obligated to grant such renewal. The Facility has been accounted for as an operating lease under the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 13 and related interpretations, including Financial Interpretation No. 46. Future minimum rental commitments under the Facility have been included in the table of contractual obligations below.
Capital expenditures were $136.5 million in 2003, $102.3 million in 2002 and $68.5 million in 2001. These expenditures were primarily related to the opening of new stores, as well as the relocation or remodeling of existing stores. We either opened or acquired 128, 106 and 203 net stores in 2003, 2002 and 2001, respectively. We remodeled or relocated 46 stores and two distribution centers in 2003, 27 stores in 2002 and 16 stores in 2001. Three new distribution centers were acquired; one in 2003, located near Mobile, Alabama and two in October 2001, located in Nashville, Tennessee and Knoxville, Tennessee.
Our continuing store expansion program requires significant capital expenditures and working capital principally for inventory requirements. Our 2004 growth plans call for approximately 140 new stores and capital expenditures of $125 million to $135 million. The costs associated with the opening of a new store (including the cost of land acquisition, improvements, fixtures, inventory and computer equipment) are estimated to average approximately $900,000 to $1.1 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site. Although the cost to acquire the business of an independently owned parts store varies, depending primarily upon the amount of inventory and the amount, if any, of real estate being acquired, we estimate that the average cost to acquire such a business and convert it to one of our stores is approximately $400,000. We plan to finance our expansion program through cash expected to be provided from operating activities and available borrowings under our existing credit facilities.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (continued)
On July 29, 2002, the Company completed an unsecured, three-year syndicated credit facility (Credit Facility) in the amount of $150 million led by Wells Fargo Bank as the Administrative Agent, replacing a five-year syndicated credit facility. The Credit Facility is guaranteed by all of our subsidiaries and may be increased to a total of $200 million, subject to the availability of such additional credit from either existing banks within the Credit Facility or other banks. The Credit Facility bears interest at LIBOR plus a spread ranging from 0.875% to 1.375% (2.06% at December 31, 2003 and 2.26% at December 31, 2002) and expires in July 2005. At December 31, 2003 and 2002, $20.0 million and $90.0 million, respectively, of the Credit Facility was outstanding. Additionally, letters of credit totaling $11.0 million and $6.0 million were outstanding at December 31, 2003 and 2002, respectively. Accordingly, our aggregate availability for additional borrowings under the Credit Facility was $119.0 million and $54.0 million at December 31, 2003 and 2002, respectively. Prior to July 29, 2002, the Company had available an unsecured credit facility providing for maximum borrowings of $140 million. The facility was comprised of a revolving credit facility of $125 million, and a term loan of $15 million. The credit facility, which bore interest at LIBOR plus 0.50%, expired in January 2003. All borrowings outstanding under the old credit facility were fully repaid in July 2002.
Off Balance Sheet Arrangements
We have utilized various financial instruments from time to time as sources of cash when such instruments provided a cost effective alternative to our existing sources of cash. We do not believe, however, that we are dependent on the availability of these instruments to fund our working capital requirements or our growth plans.
We completed two sale-leaseback transactions in 2000 and 2001 and the Synthetic Lease in 2000, the terms of all of which are described above under Liquidity and Capital Resources. The purpose of the sale-leaseback transactions was to reduce outstanding borrowings under our former revolving credit facility. The purpose of the Synthetic Lease was to fund a portion of our store growth, primarily in 2001 and 2002.
We issue stand-by letters of credit provided by a $20 million sublimit under the Credit Facility that reduce our available borrowings. These letters of credit are issued primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. Substantially all of the outstanding letters of credit have a one-year term from the date of issuance and have been issued to replace surety bonds that were previously issued. Letters of credit totaling $11.0 million and $6.0 million were outstanding at December 31, 2003 and 2002, respectively.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Contractual Obligations
Our contractual obligations, including commitments for future payments under non-cancelable lease arrangements and short- and long-term debt arrangements, are summarized below and are fully disclosed in Notes 5 and 6 to the consolidated financial statements.
We believe that our existing cash and cash equivalents, cash expected to be provided by operating activities, available bank credit facilities and trade credit will be sufficient to fund both our short- and long-term capital needs for the foreseeable future.
Inflation and Seasonality
We succeeded, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. As a result, we do not believe that our operations have been materially affected by inflation.
Our business is somewhat seasonal, primarily as a result of the impact of weather conditions on store sales. Store sales and profits have historically been higher in the second and third quarters (April through September) of each year than in the first and fourth quarters.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Quarterly Results
The following table sets forth certain quarterly unaudited operating data for fiscal 2003 and 2002. The unaudited quarterly information includes all adjustments which management considers necessary for a fair presentation of the information shown.
The unaudited operating data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report, and the other financial information included therein.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Shareholder Rights Plan
On May 17, 2002, the Board of Directors adopted a Shareholder Rights Plan. One Right was distributed for each share of common stock, par value $.01 per share, of the Company held by shareholders of record as of the close of business on May 31, 2002. Each right initially entitles shareholders to buy a unit representing one one-hundredth of a share of a new series of preferred stock of the Company for $160 and expires on May 30, 2012. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company's common stock. If a person or group acquires beneficial ownership of 15% or more of the Company's common stock, each right (other than rights held by the acquiror) will, unless the rights are redeemed by the Company, become exercisable upon payment of the exercise price of $160 for common stock of the Company having a market value of twice the exercise price of the right. A copy of the Stockholder Rights Plan was filed on May 28, 2002, with the Securities and Exchange Commission, as Exhibit 99.1 to our report on Form 8-K.
New Accounting Standards
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Under the new rules, a liability for the costs associated with an exit or disposal activity will be recognized when the liability is incurred as opposed to the date of an entity's commitment to an exit plan. The new rules were effective for exit or disposal activities initiated after December 31, 2002. The adoption of the new rules did not have a significant impact on our consolidated financial position or results of operations.
In November 2002, the FASB issued Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees. The interpretation elaborates on the disclosures to be made in interim and annual financial statements of a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing such guarantee. Initial recognition and measurement provisions of the interpretation were applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of interim or annual periods ending after December 15, 2002. As of December 31, 2003 and 2002, we did not have any outstanding guarantees other than subsidiary guarantees of parent debt and a residual value guarantee as disclosed in Notes 5 and 6, respectively, to the consolidated financial statements.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
New Accounting Standards (continued)
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, amending SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 gives companies electing to expense employee stock options three methods to do so. In addition, the statement amends the disclosure requirements to require more prominent disclosure about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. We have elected to continue using the intrinsic value method of accounting for stock-based compensation, therefore, SFAS No. 148 did not have any effect on our consolidated financial position or results of operations. See Note 9 to the consolidated financial statements for additional information regarding stock-based compensation.
In January 2003, the FASB issued Financial Interpretation 46, Consolidation of Variable Interest Entities. The interpretation expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. The interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of the interpretation applied immediately to variable interest entities created after January 31, 2003. The consolidation requirements applied to older entities in the first fiscal year or interim period beginning after December 15, 2003. On June 26, 2003, we signed an Amended and Restated Agreement relating to our properties leased from SunTrust Equity Funding, LLC. The agreement with SunTrust Equity Funding, LLC has been recorded and disclosed as an operating lease in the consolidated financial statements in accordance with SFAS No. 13 and Financial Interpretation 46.
In March 2003, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. Under the new guidance, cash consideration received from a vendor should be classified as a reduction of cost of sales. If the consideration received represents a payment for assets delivered to the vendor, it should be classified as revenue. If the consideration is a reimbursement of a specific, incremental, identifiable cost incurred in selling the vendor's product, the cost should be characterized as a reduction of that cost incurred. The guidance was adopted by the Company on January 1, 2003. The Company's policies and practices for recording such vendor concessions as co-operative advertising and vendor allowances and discounts were aligned with the EITF's guidance both prior to and after the application date, therefore, the release did not have any effect on our consolidated financial position or results of operations.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Forward-Looking Statements
We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained within this annual report discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described in these forward-looking statements. Please refer to the Risk Factors sections of the Company's annual report on Form 10-K for the year ended December 31, 2003, for more details.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Consolidated Balance Sheets (continued)
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Consolidated Statements Of Income
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Consolidated Statements Of Shareholders' Equity
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Consolidated Statements Of Cash Flows
See accompanying notes.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
O'Reilly Automotive, Inc. (the Company) is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies and accessories to both the do-it-yourself (DIY) customer and the professional installer throughout Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Tennessee, Texas and Virginia.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
Over-the-counter retail sales are recorded when the customer takes possession of merchandise. Sales to professional installers, also referred to as "commercial sales", are recorded upon delivery of merchandise to the customer, generally at the customer's place of business. Wholesale sales to other retailers, also referred to as "jobber sales" are recorded upon shipment of merchandise. All sales are recorded net of estimated allowances and discounts.
Use of Estimates
The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States (GAAP), requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Inventory
Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. Cost has been determined using the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) method of costing inventory had been used by the Company, inventory would have been $543,924,000 and $499,501,000 as of December 31, 2003, and 2002, respectively. During 2003, the Company entered into various programs and arrangements with certain of its vendors that provide for extended dating and payment terms for inventory purchases, including pay-on-scan arrangements.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amounts Receivable from Vendors
The Company receives concessions from its vendors through a variety of programs and arrangements, including co-operative advertising, devaluation programs, allowances for warranties and volume purchase rebates. Co-operative advertising allowances that are incremental to our advertising program, specific to a product or event and identifiable for accounting purposes are reported as a reduction of advertising expense in the period in which the advertising occurred. All other vendor concessions are recognized as a reduction of cost of sales when recognized in the consolidated income statement. Amounts receivable from vendors also includes amounts due the Company for changeover merchandise and product returns. Reserves for uncollectable amounts receivable from vendors are provided for in the Company's consolidated financial statements and consistently have been within management's expectations.
Property and Equipment
Property and equipment are carried at cost. Depreciation is provided on straight-line and accelerated methods over the estimated useful lives of the assets. Service lives for property and equipment generally range from three to forty years. Leasehold improvements are amortized over the lesser of the useful lives or the term of the respective underlying lease. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included in the determination of net income as a component of other income (expense). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average rates paid for long-term borrowings. Total interest costs capitalized for the years ended December 31, 2003, 2002 and 2001, were $1,808,000, $369,000 and $1,358,000, respectively.
Income Taxes
The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. The liability method provides that deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense charged to operations amounted to $19,533,000, $14,442,000 and $12,796,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Pre-opening Costs
Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to operations as incurred.
Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its employee stock options because, as discussed in Note 10, the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, requires the use of option valuation models that were not developed for use in valuing employee stock options. SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, further established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. Under the intrinsic value method in accordance with APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the year ended December 31, is as follows:
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per Share
Basic earnings per share is based on the weighted-average outstanding common shares. Diluted earnings per share is based on the weighted-average outstanding shares adjusted for the effect of common stock equivalents. Common stock equivalents that could potentially dilute basic earnings per share in the future that were not included in the fully diluted computation because they would have been antidilutive were 66,750, 816,250 and 28,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
Cash Equivalents
Cash equivalents consist of investments with maturities of 90 days or less at the day of purchase.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts and notes receivable.
The Company grants credit to certain customers who meet the Company's pre-established credit requirements. Concentrations of credit risk with respect to these trade receivables are limited because the Company's customer base consist of a large number of smaller customers, thus spreading the trade credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures and generally does not require security when trade credit is granted to customers. Credit losses are provided for in the Company's consolidated financial statements and consistently have been within management's expectations.
The carrying value of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and long-term debt, as reported in the accompanying consolidated balance sheets, approximates fair value.
Notes Receivable
The Company had notes receivable from vendors and other third parties amounting to $27,636,000 and $2,362,000 at December 31, 2003 and 2002, respectively. The notes receivable, which bear interest at rates ranging from 0% to 6%, are due in varying amounts through August 2017.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements
In June, 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Under the new rules, a liability for the costs associated with an exit or disposal activity will be recognized when the liability is incurred as opposed to the date of an entity's commitment to an exit plan. The new rules are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of the new rules did not have a significant impact on our consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, amending SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 gives companies electing to expense employee stock options three methods to do so. In addition, the statement amends the disclosure requirements to require more prominent disclosure about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. The Company has elected to continue using the intrinsic value method of accounting for stock-based compensation, therefore, SFAS No. 123 did not have any effect on the Company's consolidated financial position or results of operations. See Note 9 to the consolidated financial statements for additional information regarding stock-based compensation.
In November 2002, the FASB issued Financial Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees. The interpretation elaborates on the disclosures to be made in interim and annual financial statements of a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing such guarantee. Initial recognition and measurement provisions of the interpretation were applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements of interim or annual periods ending after December 15, 2002. As of December 31, 2003 and 2002, the Company did not have any outstanding guarantees other than subsidiary guarantees of parent debt and a residual value guarantee as disclosed in Notes 5 and 6, respectively, to the consolidated financial statements.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Pronouncements (continued)
In January 2003, the FASB issued Financial Interpretation 46, Consolidation of Variable Interest Entities. The interpretation expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. The interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of the interpretation applied immediately to variable interest entities created after January 31, 2003. The consolidation requirements applied to older entities in the first fiscal year and interim period beginning after December 15, 2003. On June 26, 2003, the Company signed an Amended and Restated Agreement relating to our properties leased from SunTrust Equity Funding, LLC. As a result, the agreement with SunTrust Equity Funding, LLC has been properly recorded and disclosed as an operating lease in the consolidated financial statements.
In March 2003, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. Under the new guidance, cash consideration received from a vendor should be classified as a reduction of cost of sales. If the consideration received represents a payment for assets delivered to the vendor, it should be classified as revenue. If the consideration is a reimbursement of a specific, incremental and identifiable cost incurred in selling the vendor's product, the cost should be characterized as a reduction of that cost incurred. The guidance was adopted by the Company on January 1, 2003. The Company's policies and practices for recording such vendor concessions as co-operative advertising and vendor allowances and discounts were aligned with the EITF's guidance both prior to and after the application date, therefore, the release did not have any effect on our consolidated financial position or results of operations.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 2-ACQUISITION
On October 1, 2001, the Company purchased all of the outstanding stock of Mid-State Automotive Distributors, Inc. (Mid-State) for approximately $20.5 million including acquisition costs. Mid-State was a specialty retailer which supplied automotive aftermarket parts throughout certain states in the southeastern part of the United States. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of Mid-State are included in the consolidated statements of income from the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The pro forma effect on earnings of the acquisition of Mid-State was not material.
NOTE 3-RELATED PARTIES
The Company leases certain land and buildings related to its O'Reilly Auto Parts stores under six-year operating lease agreements with O'Reilly Investment Company and O'Reilly Real Estate Company, partnerships in which certain shareholders and directors of the Company are partners. Generally, these lease agreements provide for renewal options for an additional six years at the option of the Company. Additionally, the Company leases certain land and buildings related to O'Reilly Auto Parts stores under 15-year operating lease agreements with O'Reilly-Wooten 2000 LLC, which is owned by certain shareholders of the Company. Generally, these lease agreements provide for renewal options for two additional five-year terms at the option of the Company (see Note 6). Rent expense under these operating leases totaled $3,238,000, $3,222,000 and $2,894,000 in 2003, 2002 and 2001, respectively.
NOTE 4-NOTE PAYABLE TO BANK
At December 31, 2001, the Company had available short-term unsecured bank lines of credit providing for maximum borrowings of $5 million, all of which was outstanding at December 31, 2001. The lines of credit were fully repaid in 2002.
NOTE 5-LONG-TERM DEBT
On July 29, 2002, the Company completed an unsecured, three-year syndicated credit facility (Credit Facility) in the amount of $150 million led by Wells Fargo Bank as the Administrative Agent, replacing a five-year syndicated credit facility. The Credit Facility is guaranteed by all of our subsidiaries and may be increased to a total of $200 million, subject to availability of such additional credit from either existing banks within the Credit Facility or other banks. The Credit Facility bears interest at LIBOR plus a spread ranging from 0.875% to 1.375% (2.06% at December 31, 2003 and 2.26% at December 31, 2002) and expires in July 2005. At December 31, 2003 and 2002, $20.0 million and $90.0 million, respectively, of the Credit Facility was outstanding. Additionally, letters of credit totaling $11.0 million and $6.0 million were outstanding at December 31, 2003 and 2002, respectively. Accordingly, our aggregate availability for additional borrowings under the Credit Facility was $119.0 million and $54.0 million at December 31, 2003 and 2002, respectively. Prior to July 29, 2002, the Company had available an unsecured credit facility providing for maximum borrowings of $140 million. The former facility was comprised of a revolving credit facility of $125 million, and a term loan of $15 million. The former facility, which bore interest at LIBOR plus 0.50%, expired in January 2003. All borrowings outstanding under the old credit facility were fully repaid in July 2002.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 5-LONG-TERM DEBT (CONTINUED)
The Company issues stand-by letters of credit provided by a $20 million sublimit under the Credit Facility that reduce available borrowings. These letters of credit are issued primarily to satisfy the requirements of workers compensation, general liability and other insurance policies. Substantially all of the outstanding letters of credit have a one-year term from the date of issuance and have been issued to replace surety bonds that were previously issued. Letters of credit totaling $11.0 million and $6.0 million were outstanding at December 31, 2003 and 2002, respectively.
On May 16, 2001, the Company completed a $100 million private placement of two series of unsecured senior notes (Senior Notes). The Series 2001-A Senior Notes were issued for $75 million, are due May 16, 2006, and bear interest at 7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are due May 16, 2008, and bear interest at 7.92% per year. The private placement agreement allows for a total of $200 million of Senior Notes issuable in series. Proceeds from the transaction were used to reduce outstanding borrowings under the Company's former revolving credit facility.
The Company leases certain computer equipment under capitalized leases. The lease agreements have terms ranging from 30 months to 36 months, expiring from 2004 to 2006. At December 31, 2003, the monthly installments under these agreements were approximately $85,000. The present value of the future minimum lease payments under these agreements totaled $882,000 and $549,000 at December 31, 2003, and 2002, respectively, which has been classified as long-term debt in the accompanying consolidated financial statements. During 2003, 2002 and 2001, the Company purchased $1,426,000, $812,000 and $467,000, respectively, of assets under capitalized leases.
Additionally, the Company has various unsecured notes payable to individuals and banks, amounting to $81,000 and $172,000, at December 31, 2003, and 2002, respectively. The weighted-average interest rate on these notes is 7.2% with monthly installments of approximately $2,000 including interest.
Principal maturities of long-term debt for each of the next five years ending December 31, are as follows (amounts in thousands):
Cash paid by the Company for interest during the years ended December 31, 2003, 2002, and 2001, amounted to $6,864,000, $9,248,000, and $9,092,000, respectively.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 6-COMMITMENTS
Lease Commitments
On June 26, 2003, we completed an amended and restated master agreement to our $50 million Synthetic Operating Lease Facility (the Facility or the Synthetic Lease) with a group of financial institutions. The terms of the Facility provide for an initial lease period of five years, a residual value guarantee of approximately $44.2 million at December 31, 2003, and purchase options on the properties. The Facility also contains a provision for an event of default whereby the lessor, among other things, may require us to purchase any or all of the properties. One additional renewal period of five years may be requested from the lessor, although the lessor is not obligated to grant such renewal. The amended and restated Facility has been accounted for as an operating lease under SFAS No. 13 and related interpretations, including Financial Interpretation No. 46. Future minimum rental commitments under the Facility have been included in the table of future minimum annual rental commitments below.
On December 29, 2000, the Company completed a sale-leaseback transaction. Under the terms of the transaction, the Company sold 90 properties, including land, buildings and improvements, which generated $52.3 million of additional cash. The lease, which is being accounted for as an operating lease, provides for an initial lease term of 21 years and may be extended for one initial ten-year period and two additional successive periods of five years each. The resulting gain of $4.5 million has been deferred and is being amortized over the initial lease term. Net rent expense is approximately $5.5 million annually and is included in the table of future minimum annual rental commitments below.
In August 2001, the Company completed a sale-leaseback with O'Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company). The transaction involved the sale and leaseback of nine O'Reilly Auto Parts stores and resulted in approximately $5.6 million of additional cash to the Company. The transaction did not result in a material gain or loss. The lease, which has been accounted for as an operating lease, calls for an initial term of 15 years with three five-year renewal options.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 6-COMMITMENTS (CONTINUED)
The Company also leases certain office space, retail stores, property and equipment under long-term, non-cancelable operating leases. Most of these leases include renewal options and some include options to purchase and provisions for percentage rent based on sales. At December 31, 2003, future minimum rental payments under all of the Company's operating leases for each of the next five years and in the aggregate are as follows (amounts in thousands):
Rental expense amounted to $31,865,000, $29,652,000 and $25,122,000 for the years ended December 31, 2003, 2002, and 2001, respectively.
Other Commitments
The Company had construction commitments, which totaled approximately $52.8 million, at December 31, 2003.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 7-LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the conduct of its business. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, they will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
NOTE 8-EMPLOYEE BENEFIT PLANS
The Company sponsors a contributory profit sharing and savings plan that covers substantially all employees who are 21 years of age with at least six months of service. A total of 1,600,000 shares of common stock were reserved for issuance under the plan. Employees may contribute up to 100% of their annual compensation subject to Internal Revenue Code maximum limitations. The Company has agreed to make matching contributions equal to 50% of the first 2% of each employee's contribution and 25% of the next 4% of each employee's contribution. Additional contributions to the plan may be made as determined annually by the Board of Directors. After two years of service, Company contributions and earnings thereon vest at the rate of 20% per year. Company contributions charged to operations amounted to $4,353,000 in 2003, $3,438,000 in 2002 and $3,207,000 in 2001. Company contributions, in the form of common stock, to the profit sharing and savings plan to match employee contributions during the years ended December 31 were as follows:
Profit sharing contributions accrued at December 31, and funded in the next year through the issuance of shares of the Company's common stock were as follows:
The Company also sponsors a non-funded non-contributory defined benefit health care plan, which provides certain health benefits to qualified retired employees. According to the terms of this plan, retirees' annual benefits are limited to $1,000 per employee starting at age 66 for employees with 20 or more years of service. Post-retirement benefit costs for each of the years ended December 31, 2003, 2002, and 2001 amounted to $12,000.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 8-EMPLOYEE BENEFIT PLANS (CONTINUED)
Additionally, the Company has adopted a stock purchase plan under which 1,300,000 shares of common stock were reserved for issuance. Under the plan, substantially all employees and non-employee directors have the right to purchase shares of the Company's common stock monthly at a price equal to 85% of the fair market value of the stock, not to exceed 5% of the participants annual salary. Purchases of common stock under the plan during the years ended December 31 were as follows:
The Company has in effect a performance incentive plan for the Company's senior management under which 400,000 shares of stock were reserved for issuance. Shares awarded under the plan vest equally over a three-year period and are held in escrow until such vesting has occurred. Shares are forfeited when an employee ceases employment. Shares, net of forfeitures, issued under the plan during the years ended December 31 were as follows:
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 9-SHAREHOLDERS' EQUITY
Shareholder Rights Plan
On May 17, 2002, the Board of Directors adopted a Shareholder Rights Plan. One Right was distributed for each share of common stock, par value $.01 per share, of the Company held by stockholders of record as of the close of business on May 31, 2002. The Rights initially entitle stockholders to buy a unit representing one one-hundredth of a share of a new series of preferred stock of the Company for $160 and expire on May 30, 2012. The Rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company's common stock. If a person or group acquires beneficial ownership of 15% or more of the Company's common stock, each Right (other than Rights held by the acquiror) will, unless the Rights are redeemed by the Company, become exercisable upon payment of the exercise price of $160 for common stock of the Company having a market value of twice the exercise price of the Right. A copy of the Stockholder Rights Plan was filed on May 28, 2002, with the Securities and Exchange Commission, as Exhibit 99.1 to our report on Form 8-K.
Stock Option Plans
The Company has a stock option plan under which incentive stock options or non-qualified stock options may be granted to officers and key employees. An aggregate of 12,000,000 shares of common stock were reserved for issuance under this plan. The exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and the options will expire no later than 10 years from the date of grant. Options granted pursuant to the plan become exercisable no sooner than six months from the date of grant. All grants under the plan since its inception have been non-qualified stock option grants. A summary of outstanding stock options under this plan is as follows:
Options to purchase 1,223,409, 1,566,104 and 1,250,261 shares of common stock were exercisable at December 31, 2003, 2002, and 2001, respectively.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 9-SHAREHOLDERS' EQUITY (CONTINUED)
The Company also maintains a stock option plan for non-employee directors of the Company under which 500,000 shares of common stock were reserved for issuance. All director stock options are granted at fair market value on the date of grant and expire on the earlier of termination of service to the Company as a director or seven years. Options granted under this plan become exercisable six months from the date of grant. A summary of outstanding stock options under this plan is as follows:
All options under this plan were exercisable at December 31, 2003, 2002, and 2001.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee and non-employee director stock options under the fair value method.
The fair values for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003, 2002, and 2001, respectively: risk-free interest rates of 3.61%, 4.01% and 5.16%; volatility factors of the expected market price of the Company's common stock of .458, .481, and .475; and weighted-average expected life of the options of 9.4, 9.0 and 9.0 years. The Company assumed a 0% dividend yield over the expected life of the options. The weighted-average fair values of options granted during the years ended December 31, 2003, 2002, and 2001 were $20.56, $17.75 and $16.52, respectively. The weighted-average remaining contractual life at December 31, 2003, for all outstanding options under the Company's stock option plans is 7.5 years. The weighted-average exercise price for all outstanding options under the Company's stock option plans was $26.11, $22.78 and $20.63 at December 31, 2003, 2002 and 2001, respectively.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 10-INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted income per common share:
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 11-INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows at December 31:
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Notes to Consolidated Financial Statements
NOTE 11-INCOME TAXES (CONTINUED)
The provision for income taxes consists of the following:
A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows:
The tax benefit associated with the exercise of non-qualified stock options has been reflected as additional paid-in capital in the accompanying consolidated financial statements.
During the years ended December 31, 2003, 2002, and 2001, cash paid by the Company for income taxes amounted to $43,007,000, $31,119,000 and $28,676,000, respectively.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Report Of Independent Auditors
The Board of Directors and Shareholders O'Reilly Automotive, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of O'Reilly Automotive, Inc. and Subsidiaries as of December 31, 2003, and 2002, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of O'Reilly Automotive, Inc. and Subsidiaries at December 31, 2003, and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri February 19, 2004
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
Shareholder Information
CORPORATE ADDRESS
233 South Patterson Springfield, Missouri 65802 417/862-3333 Web site - www.oreillyauto.com
REGISTRAR AND TRANSFER AGENT
UMB Bank 928 Grand Boulevard Kansas City, Missouri 64141-0064
Inquiries regarding stock transfers, lost certificates or address changes should be directed to UMB Bank at the above address.
INDEPENDENT AUDITORS
Ernst & Young LLP One Kansas City Place Kansas City, Missouri 64105-2143
LEGAL COUNSEL
Gallop Johnson & Neuman, L.C. 101 South Hanley Road, Suite 1600 St. Louis, Missouri 63105
Skadden, Arps, Slate, Meagher & Flom 333 West Wacker Drive, Suite 2100 Chicago, Illinois 60606
ANNUAL MEETING
The annual meeting of shareholders of O'Reilly Automotive, Inc. will be held at 10:00 a.m. local time on May 4, 2004, at the University Plaza Convention Center, 333 John Q. Hammons Parkway in Springfield, Missouri. Sharedholders of record as of February 27, 2004, will be entitled to vote at this meeting.
FORM 10-K REPORT
The Form 10-K Report of O'Reilly Automotive, Inc. filed with the Securities and Exchange Commission and our quarterly press releases are available without charge to shareholders upon written request. These requests and other investor contacts should be directed to James R. Batten, Executive Vice President of Finance/Chief Financial Officer, at the corporate address.
TRADING SYMBOL
The Company's common stock is traded on The Nasdaq Stock Market (National Market) under the symbol ORLY.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 13.1 - Portions of the 2003 Annual Report to Shareholders (continued)
NUMBER OF SHAREHOLDERS
As of February 27, 2004, O'Reilly Automotive, Inc. had approximately 26,299 shareholders based on the number of holders of record and an estimate of the number of individual participants represented by security position listings.
ANALYST COVERAGE
The following analysts provide research coverage of O'Reilly Automotive, Inc.:
Advest, Inc. - Derrick Irwin AG Edwards & Sons - Brian Postol Lehman Brothers Equities Research - Alan Rifkin Raymond James & Associates - Gerald Marks Sidoti & Company - Scott Stember Smith Barney - Bill Sims SunTrust Robinson Humphrey Capital Markets - Frank Brown Wells Fargo Securities, LLC - Christopher Svezia Whitaker Securities LLC - Cid Wilson William Blair & Company - Sharon Zackfia UBS Equities - Gary Balter Piper Jaffray - Reed Anderson
MARKET PRICES AND DIVIDEND INFORMATION
The prices in the table below represent the high and low sales price for O'Reilly Automotive, Inc. common stock as reported by the Nasdaq Stock Market.
The common stock began trading on April 22, 1993. No cash dividends have been declared since 1992, and the Company does not anticipate paying any cash dividends in the foreseeable future.
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 21.1 - Subsidiaries of the Company
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 19, 2004 included in the 2003 Annual Report to Shareholders of O'Reilly Automotive, Inc. and Subsidiaries.
Our audits also included the consolidated financial statement schedule of O'Reilly Automotive, Inc. and Subsidiaries listed in Item 15(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-61632, Form S-8 No. 33-73892, Form S-8 No. 33-91022, Form S-8 No. 333-59568, Form S-8 No. 333-63467 and Form S-8 No. 333-111976) pertaining to the O'Reilly Automotive, Inc. 2003 Employee Stock Option Plan, the O'Reilly Automotive, Inc. 2003 Director Stock Option Plan, the O'Reilly Automotive, Inc. 1993 Stock Option Plan, the O'Reilly Automotive, Inc. 1993 Director Stock Option Plan and the O'Reilly Automotive, Inc. Stock Purchase Plan of O'Reilly Automotive, Inc. of our report dated February 19, 2004, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the consolidated financial statement schedule included in this Annual Report (Form 10-K) of O'Reilly Automotive, Inc. for the year ended December 31, 2003.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri March 9, 2004
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 31.1 - CEO Certification
CERTIFICATIONS
I, David E. O'Reilly, certify that:
1. I have reviewed this annual report on Form 10-K of O'Reilly Automotive, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
March 12, 2004 /s/ David E. O'Reilly ----------------------------------------- Co-Chairman and Chief Executive Officer (Principal Executive Officer)
O'Reilly Automotive, Inc. and Subsidiaries Exhibit 31.2 - CFO Certification
CERTIFICATIONS
I, James R. Batten, certify that:
1. I have reviewed this annual report on Form 10-K of O'Reilly Automotive, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
March 12, 2004 /s/ James R. Batten ----------------------------------------- Executive Vice-President of Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES Exhibit 32.1 - CEO Certification
O'REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of O'Reilly Automotive, Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David E. O'Reilly, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ David E. O'Reilly - ----------------------------------------- David E. O'Reilly Chief Executive Officer
March 12, 2004
This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose.
O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES Exhibit 32.2 - CFO Certification
O'REILLY AUTOMOTIVE, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of O'Reilly Automotive, Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James R. Batten, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ James R. Batten - ------------------------------------- James R. Batten Chief Financial Officer
March 12, 2004
This certification is made solely for purposes of 18 U.S.C. Section 1350, and not for any other purpose.