-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hwi2ZpGAfE3WUqHqAAhsu7/0ftsAvU6ARaXEFh4H5L3g9vwccHdGQ9Nv/7LnWzky Qpk78H5C3baFntLfGI+IDg== 0000950131-99-001410.txt : 19990311 0000950131-99-001410.hdr.sgml : 19990311 ACCESSION NUMBER: 0000950131-99-001410 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: O REILLY AUTOMOTIVE INC CENTRAL INDEX KEY: 0000898173 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO & HOME SUPPLY STORES [5531] IRS NUMBER: 440618012 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-73377 FILM NUMBER: 99561249 BUSINESS ADDRESS: STREET 1: 233 S PATTERSON CITY: SPRINGFIELD STATE: MO ZIP: 65802 BUSINESS PHONE: 4178622674 MAIL ADDRESS: STREET 1: 233 SOUTH PATTERSON CITY: SPRINGFIELD STATE: MO ZIP: 65802 S-3/A 1 FORM S-3 AMENDMENT #1 As filed with the Securities and Exchange Commission on March 10, 1999 Registration No. 333-73377 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- O'REILLY AUTOMOTIVE, INC. (Exact name of registrant as specified in its charter) --------------- MISSOURI 44-0618012 (State or other jurisdiction of (IRS employer incorporation or organization) identification number) 233 South Patterson Springfield, Missouri 65802 (417) 862-6708 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- DAVID E. O'REILLY President and Chief Executive Officer O'Reilly Automotive, Inc. 233 South Patterson Springfield Missouri 65802 (417) 862-6708 (Name, address, including zip code, and telephone number, including area code, of agent for service) With copies to: PETER C. KRUPP, ESQ. LAWRENCE D. LEVIN, ESQ. Skadden, Arps, Slate, Meagher & Flom Katten Muchin & Zavis (Illinois) 525 W. Monroe Street 333 W. Wacker Drive, Suite 2100 Suite 1600 Chicago, Illinois 60606 (312) 902-5200 (312) 407-0700 --------------- Approximate date of commencement of proposed sale to public: As soon as practicable after this registration statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering: [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [_] --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUBJECT TO COMPLETION -- March 10, 1999 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +We will amend and complete the information in this prospectus. Although we + +are permitted by US federal securities law to offer these securities using + +this prospectus, we may not sell them or accept your offer to buy them until + +the documentation filed with the SEC relating to these securities has been + +declared effective by the SEC. This prospectus is not an offer to sell these + +securities or our solicitation of your offer to buy these securities in any + +jurisdiction where that would not be permitted or legal. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Prospectus , 1999 [Logo] O'Reilly Automotive, Inc. 4,140,000 Shares of Common Stock - -------------------------------------------------------------------------------- The Company: The Offering: . We are one of the . The Company is largest specialty offering 3,000,000 of retailers of the shares and automotive existing shareholders aftermarket parts, are offering tools, supplies, 1,140,000 of the equipment and shares. accessories in the United States, serving both the "do- it-yourself" and professional installer markets. . The underwriters have an option to purchase an additional 621,000 shares from the Company to cover over-allotments. . O'Reilly Automotive, Inc. 233 South Patterson Springfield, MO 65802 (417) 862-6708 . There is an existing trading market for these shares. The reported last sales price on March 8, 1999 was $43 11/16 per share. . Nasdaq Symbol: ORLY . We plan to repay debt with the proceeds from this offering in order to facilitate future expansion of our operations. We will not receive any proceeds from the shares sold by the selling shareholders. . Closing: , 1999. ------------------------------------------------
Per Share Total ------------------------------------------------------ Public offering price: $ $ Underwriting fees: Proceeds to Company: Proceeds to selling shareholders: ------------------------------------------------------
This investment involves risk. See "Risk Factors" beginning on Page 7. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- Donaldson, Lufkin & Jenrette George K. Baum & Company William Blair & Company [Map of the states in which O'Reilly operates indicating the number of O'Reilly stores in each such state.] TABLE OF CONTENTS
Page Prospectus Summary.................. 3 Risk Factors........................ 7 Use of Proceeds..................... 10 Price Range of Common Stock and Dividend Policy.................... 11 Capitalization...................... 12 Selected Consolidated Financial Data............................... 13 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 14 Business............................ 20
Page Management............................................................ 31 Selling Shareholders.................................................. 33 Description of Capital Stock.......................................... 35 Underwriting.......................................................... 36 Incorporation of Certain Documents by Reference....................... 37 Additional Information................................................ 38 Legal Matters......................................................... 39 Experts............................................................... 39 Index to Consolidated Financial Statements............................ F-1
PROSPECTUS SUMMARY This summary is qualified by more detailed information appearing in other sections of this prospectus. The other information is important, so please read this entire prospectus carefully. Unless otherwise indicated, the information in this prospectus assumes (1) the underwriters' over-allotment option will not be exercised and (2) the exercise of 340,000 options to purchase our common stock which expire on April 21, 1999, held by four of our directors and executive officers. Unless otherwise indicated, "we," "us," "our" and similar terms, as well as references to the "Company" and "O'Reilly," refer to O'Reilly Automotive, Inc. and its subsidiaries. The Company 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, or DIY, customers and professional installers. At December 31, 1998 we operated 491 stores in Texas, Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana, Nebraska and Illinois. Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items and accessories, and a complete line of autobody paint and related materials, automotive tools and professional service equipment. In January 1998, we expanded into Texas and Louisiana by acquiring Hi-Lo Automotive, Inc., a specialty retailer and supplier of automotive aftermarket products. Of the 182 net Hi-Lo stores we acquired, 165 are located in Texas and 17 are located in Louisiana. Our annual product sales increased from $316.4 million in 1997 to $616.3 million in 1998. This increase was primarily the result of our acquisition of Hi-Lo, the opening of 50 net stores and continued strong growth in same store product sales. Our same store product sales at all stores increased by 6.8% for the year and 13.3% for the fourth quarter of 1998. Our net income increased approximately 33% from $23.1 million in 1997 to $30.8 million in 1998. 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. Competitive Advantages Proven Ability to Execute Dual Market Strategy. From the mid-1980s through 1997, we derived approximately 50% of our product sales from our DIY customers and approximately 50% from our professional installer customers. Following the acquisition of Hi-Lo, in 1998 we derived approximately 57% of our product sales from our DIY customers and approximately 43% from our professional installer customers. We believe our ability to serve both DIY customers and professional installers is a competitive advantage which enables us to: . target a larger base of consumers of automotive aftermarket parts; . capitalize on our existing retail and distribution infrastructure; 3 . profitably operate both in large markets and less densely populated geographic areas which typically attract fewer competitors; and . enhance service levels offered to our DIY customers by offering a broad selection of stock keeping units and extensive product knowledge required by professional installers. 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: . superior in-store service through highly-motivated, technically proficient store personnel, referred to as professional parts people, using advanced point-of-sale systems; . an extensive selection of products; . attractive stores in convenient locations; and . competitive pricing, with a low price guarantee. Technically Proficient Professional Parts People. Our highly proficient store personnel, who undergo extensive and ongoing training, provide us with a significant competitive advantage, particularly over less specialized retail operators. Strategic Distribution Systems. We believe that the geographic concentration of our store network in nine contiguous states and the strategic locations of our four distribution centers enable us to maintain optimum inventory levels throughout our store network. In addition, our inventory management and distribution systems electronically link each of our stores to a distribution center, providing each O'Reilly store with same day or overnight access to over 100,000 stock keeping units, many of which are hard to find items not typically stocked by other parts retailers. 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 a strong senior management team comprised of 37 professionals who average 20 years of experience with O'Reilly. In addition, our 50 district managers average over 10 years of experience with us. Growth and Expansion Strategies Aggressively Open New Stores. We intend to continue to aggressively open new stores in order to achieve greater penetration in existing markets and to expand into new, contiguous markets. We plan to open approximately 80 stores in 1999 (including a net of seven stores to be acquired from Hinojosa Auto Parts in April 1999) and approximately 100 stores in 2000. Complete the Integration of Hi-Lo. We expect to continue realizing the benefits of the nearly completed integration of the 182 net stores we acquired through the acquisition of Hi-Lo in January 1998. We have updated the products offered at the Hi-Lo stores with a product mix consistent with our existing O'Reilly stores, converted the Hi-Lo stores to our MIS systems and, in some cases, renovated or relocated Hi-Lo stores. Increase Operating Efficiencies. We believe that as we continue to grow our store network we will increasingly be able to enjoy economies of scale and operating efficiencies, particularly in the areas of purchasing, distribution, inventory management and advertising. 4 Selectively Pursue Strategic Acquisitions. We intend to selectively pursue acquisition targets that will strengthen our position as a leading automotive products retailer. Continually Enhance Store Design and Location. We continually update the location and condition of our store network through systematic renovation and relocation of existing O'Reilly stores to conform with our prototype store design, which features enhancements designed to increase product sales and operating efficiencies and enhance customer service. In 1998, we renovated or relocated 18 stores, and in 1999 we plan to renovate or relocate approximately 19 stores. Recent Developments Hinojosa Acquisition. In October 1998, we agreed to purchase substantially all of the assets of Hinojosa Auto Parts for approximately $6 million. Hinojosa is a specialty retailer and supplier of automotive aftermarket products with a chain of 10 stores and a 48,000 square foot distribution center operating in the Rio Grande Valley along the Texas/Mexico border. We expect the acquisition of Hinojosa to close in April 1999. Increase in Authorized Shares. At our regularly scheduled annual meeting on May 4, 1999, we will seek shareholder approval of a proposal to increase the number of shares of common stock authorized from 30 million to 90 million. We believe that such additional shares will provide us the flexibility to act promptly with respect to stock splits and stock dividends, public and private financings, acquisitions and other corporate purposes. The Offering Common stock offered by: The Company................. 3,000,000 shares Selling shareholders........ 1,140,000 shares Total.................... 4,140,000 shares Common stock to be outstanding after the offering............ 24,689,700 shares (a) Use of proceeds................ We intend to use the estimated net proceeds of $125.4 million (based on an assumed offering price of $43 11/16) that we will receive from this offering to repay a portion of our borrowings outstanding under our existing credit facility. We will not receive any of the proceeds from the shares sold by - -------------------- the selling shareholders. (a) Based on shares outstanding as of December 31, 1998 plus 340,000 shares underlying options to be exercised in connection with this offering. Excludes: (1) 1,626,925 shares subject to outstanding options on December 31, 1998 at a weighted average exercise price of $21.74 per share; (2) 2,523,075 additional shares reserved for issuance under our stock option and other stock-based plans; and (3) 621,000 shares subject to the underwriters' over-allotment option. Risk Factors See "Risk Factors" beginning on page 7 for a description of certain risks relevant to an investment in our common stock. These risk factors include, among others, risks related to competition in the automotive aftermarket business, our growth strategy, our acquisition strategy, our sensitivity to regional economic and weather conditions, our dependence upon key and other personnel, the significant voting control held by our principal shareholders and the Year 2000 issue. 5 Summary Consolidated Financial Data
Years Ended December 31, ------------------------------------------------------ 1994 1995 1996 1997 1998 (In thousands, except per share and operating data) Income Statement Data: Product sales........... $167,057 $201,492 $259,243 $316,399 $616,302 Gross profit............ 69,299 84,724 108,471 134,610 257,863 Operating income........ 17,157 22,037 28,851 37,084 56,901 Income before income taxes.................. 17,533 22,273 30,033 37,556 49,943 Net income.............. 11,072 14,091 18,971 23,143 30,772 Net income per common share.................. $ 0.64 $ 0.79 $ 0.91 $ 1.10 $ 1.45 Net income per common share--assuming dilution............... $ 0.64 $ 0.79 $ 0.90 $ 1.09 $ 1.42 Selected Operating Data: Number of stores at beginning of year...... 145 165 188 219 259 Net stores added(a)..... 20 23 31 40 232(b) Number of stores at year end.................... 165 188 219 259 491 Total store square footage at year end (in 000's)(c).......... 785 923 1,155 1,454 3,172 Weighted average product sales per store (in 000's)(c).............. $ 1,007 $ 1,101 $ 1,239 $ 1,306 $ 1,368 Percentage increase in same store product sales(d)............... 8.9% 8.9% 14.4% 6.8% 6.8% As of December 31, 1998 ------------------------ Actual As Adjusted(e) (In thousands) Balance Sheet Data: Working capital.................................... $208,363 $212,312 Total assets....................................... 493,288 493,288 Short-term debt.................................... 13,691 13,691 Long-term debt, less current portion............... 170,166 40,308 Shareholders' equity............................... 218,394 352,201
- -------------------- (a) Two stores were closed during 1997 and one was closed in 1998. Additionally, seven former Hi-Lo stores located in California were sold in 1998. No other stores were closed or sold during the periods presented. (b) Reflects 182 net stores acquired in the Hi-Lo acquisition and 50 net stores opened. (c) Total square footage includes normal selling, office, stockroom and receiving space. Weighted average product sales per store are weighted to consider the approximate dates of store openings. (d) We calculate same store product sales based on the change in product sales of only those stores open during both full periods being compared. We calculate the percentage increase in same store product sales based on store sales results which exclude sales of specialty machinery, sales by outside salesmen and sales to employees. (e) As adjusted to reflect the sale by us of 3,000,000 shares of common stock offered hereby at an assumed offering price of $43 11/16 and the application of the estimated net proceeds therefrom, and the effect of the exercise of the 340,000 options being exercised in connection with this offering. 6 RISK FACTORS Before you invest in our common stock, you should be aware that making such an investment involves various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus or incorporated by reference, before you decide whether to purchase shares of our common stock. Some of the information in this prospectus contains 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. 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 prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have a material adverse effect on our business, operating results and financial condition. The Automotive Aftermarket Business is Highly Competitive Both the DIY and professional installer portions of our business are highly competitive, particularly in the more densely populated areas that we serve. Some of our competitors are larger than we are and have greater financial resources. In addition, some of our competitors are smaller than we are overall but have a greater presence than we do in a particular market. For a list of our principal competitors, see the "Business--Competition" section of this prospectus. We Cannot Assure Future Growth We believe that our ability to open additional stores at an accelerated rate will be a significant factor in achieving our growth objectives for the future. Failure to achieve our growth objectives may negatively impact the trading price of our common stock. Our ability to accomplish our growth objectives is dependent, in part, on matters beyond our control, such as weather conditions, zoning and other issues related to new store site development, the availability of qualified management personnel and general business and economic conditions. We cannot be sure that our growth plans for 1999 and beyond will be achieved. For a discussion of our growth strategies, see the "Business--Growth and Expansion Strategies" section of this prospectus. Acquisitions May Not Lead to Expected Growth We acquired Hi-Lo in January 1998 and plan to acquire Hinojosa in April 1999. We expect to continue to acquire companies as an element of our growth strategy. Acquisitions involve certain risks that could cause our actual growth to differ from our expectations. For example: (1) we may not be able to continue to identify suitable acquisition candidates or to acquire additional companies at favorable prices or on other favorable terms; (2) our management's attention may be distracted; (3) we may fail to retain key acquired personnel; (4) we may assume unanticipated legal liabilities and 7 other problems; and (5) we may not be able to successfully integrate the operations (accounting and billing functions, for example) of businesses we acquire to realize economic, operational and other benefits. Sensitivity to Regional Economic and Weather Conditions All of our stores are located in the Central and Southern United States. In particular, approximately 35% of our stores are located in Texas. Therefore, our business is sensitive to the economic and weather conditions of these regions. Unusually severe or inclement weather tends to reduce sales, particularly to DIY customers. Dependence Upon Key and Other Personnel Our success has been largely dependent on the efforts of certain key personnel, including David E. O'Reilly, Lawrence P. O'Reilly, Charles H. O'Reilly, Jr., Rosalie O'Reilly Wooten and Ted F. Wise. Our business and results of operations could be materially adversely affected by the loss of the services of one or more of these individuals. Additionally, our successful implementation and management of our growth and expansion strategies will depend on our ability to continue to attract and retain qualified personnel. We cannot be sure that we will be able to continue to attract such personnel. For a further discussion of our management and personnel, see the "Business" and "Management" sections of this prospectus. Significant Voting Control is held by the O'Reilly Family Upon completion of this offering, members of the O'Reilly family will beneficially own approximately 26.0% of the then outstanding shares of our common stock (25.4% if the underwriters' over-allotment option is exercised in full). As a result, the O'Reilly family acting together will continue to be able to exercise significant voting control over the Company, including the election of our directors and on any other matter being voted on by our shareholders, including any merger, sale of assets or other change in control. We further discuss our ownership in the "Selling Shareholders" section of this prospectus. Possible Volatility of Our Stock Price The stock market and the price of our common stock may be subject to volatile fluctuations based on general economic and market conditions. The market price for our common stock may also be affected by our ability to meet analysts' expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management's attention and resources, which could have an adverse effect on our business. Year 2000 Issue Historically, certain computerized systems have used two digits rather than four to define the applicable year. Computer equipment and software and devices with imbedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000, resulting in system failure or miscalculations. This problem is generally referred to as the "Year 2000 issue." 8 Risks posed by the Year 2000 issue could include a loss of communications links with store locations, interruptions in the nightly replenishment of store inventories, and the inability to process transactions, send purchase orders or engage in similar routine business activities. We presently believe that our approach to the Year 2000 issue, including assessment, remediation, testing of necessary changes and contingency planning will minimize the business risk of the Year 2000 issue. However, if we do not make the necessary modifications or conversions or do not complete them in a timely manner, it could have a material adverse effect on our operations. In addition, our operations could be adversely affected if we fail to retain internal personnel dedicated to the remediation of the Year 2000 issue, if our external vendors fail to timely deliver software corrections and if our key business partners fail to complete their Year 2000 remediation efforts. We discuss our Year 2000 conversion in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this prospectus. Shares Eligible for Future Sale All of the shares of common stock to be outstanding following the completion of this offering will be tradeable without restriction by persons other than our affiliates. All of the shares of common stock currently held by our affiliates may be sold in reliance upon the exemptive provisions of Rule 144 of the Securities Act of 1933, as amended, subject to certain volume and other conditions imposed by such rule. We cannot predict the effect, if any, that future sales of shares of common stock or the availability of such shares for sale will have on the market price of the common stock prevailing from time to time. Sales of substantial amounts of common stock, or the perception that such sales might occur, could adversely affect the prevailing market price of the common stock. Our directors and executive officers and the selling shareholders have agreed with the underwriters that they will not, without the written consent of Donaldson, Lufkin & Jenrette Securities Corporation, publicly sell or distribute the shares of common stock held by them for a period of 90 days beginning on the date of this prospectus. 9 USE OF PROCEEDS The net proceeds from the sale of the 3,000,000 shares of common stock offered by us will be approximately $125.4 million (approximately $151.4 million if the underwriters' over-allotment option is exercised in full) at an assumed offering price of $43 11/16 per share and after deducting the estimated underwriting fees and expenses of this offering. We will not receive any proceeds from the sale of common stock by the selling shareholders. We anticipate that such net proceeds will be used to repay certain indebtedness that we incurred under our existing credit facility in connection with opening new stores, renovating or relocating existing stores and the Hi-Lo acquisition. Our unsecured five-year syndicated credit facility provides for, among other things, a $125 million revolving loan, which was extended to $160 million through July 31, 1999, and a $48 million term loan. At December 31, 1998, the effective interest rate on the revolving and term loan portions, which each mature on January 27, 2003, was 6.22% per annum. Pending use of the net proceeds as described above, such funds will be invested in short-term, interest-bearing securities or deposited in short-term interest-bearing bank accounts. 10 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Our common stock is traded on the Nasdaq National Market under the symbol ORLY. The following table sets forth, for the periods indicated, the range of high and low bid prices for our common stock as reported on the Nasdaq National Market.
Price Range of Common Stock ---------------- High Low Year Ended December 31, 1997: First Quarter............................................... $19 1/16 $15 1/2 Second Quarter.............................................. 19 7/8 16 7/8 Third Quarter............................................... 26 18 7/8 Fourth Quarter.............................................. 28 21 Year Ended December 31, 1998: First Quarter............................................... $30 1/2 $24 5/8 Second Quarter.............................................. 36 3/4 25 5/8 Third Quarter............................................... 39 1/2 28 5/8 Fourth Quarter.............................................. 48 3/8 31 5/8 Year Ended December 31, 1999: First Quarter (through March 8, 1999)....................... $52 3/4 $42
On March 8, 1999, the reported last sale price of the common stock was $43 11/16 per share. As of March 1, 1999, we had approximately 1,574 shareholders of record. Since our initial public offering, we have not paid cash dividends on our common stock. We currently anticipate that all of our earnings will be retained for development of our business and do not anticipate paying any cash dividends in the foreseeable future. In addition, our credit facility restricts our ability to pay cash dividends. 11 CAPITALIZATION The following table sets forth our short-term debt and total capitalization as of December 31, 1998 (1) on an actual basis, and (2) as adjusted to reflect (a) our receipt of the estimated net proceeds from the sale of 3,000,000 shares of our common stock offered hereby at an assumed offering price of $43 11/16 and the application of the estimated net proceeds therefrom, and (b) the effect of the exercise of the 340,000 options being exercised in connection with this offering. You should read this table in conjunction with our consolidated financial statements, including the notes thereto, and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this prospectus.
As of December 31, 1998 ----------------- As Actual Adjusted (In thousands) Short-term debt, including current portion of long-term debt. $ 13,691 $ 13,691 ======== ======== Long-term debt............................................... $170,166 $ 40,308 Shareholders' equity: Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued or outstanding............... -- -- Common stock; $0.01 par value; 30,000,000 shares authorized; 21,349,700 shares issued and outstanding (actual), 24,689,700 shares issued and outstanding (as adjusted) (a)............................................. 213 246 Additional paid-in capital................................. 82,658 216,432 Retained earnings.......................................... 135,523 135,523 -------- -------- Total shareholders' equity............................... 218,394 352,201 -------- -------- Total capitalization................................... $388,560 $392,509 ======== ========
- --------------------- (a) Based on shares outstanding as of December 31, 1998 plus 340,000 shares underlying options to be exercised in connection with this offering. Excludes: (1) 1,626,925 shares subject to outstanding options on December 31, 1998 at a weighted average exercise price of $21.74 per share; (2) 2,523,075 additional shares reserved for issuance under our stock option and other stock-based plans; and (3) 621,000 shares subject to the underwriters' over-allotment option. 12 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth our selected consolidated financial data and other operating information. The selected consolidated financial data is derived from our consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included or incorporated by reference herein.
Years Ended December 31, ------------------------------------------------ 1994 1995 1996 1997 1998 (In thousands, except per share and operating data) Income Statement Data: Product sales.............. $167,057 $201,492 $259,243 $316,399 $616,302 Cost of goods sold, including warehouse and distribution expenses..... 97,758 116,768 150,772 181,789 358,439 -------- -------- -------- -------- -------- Gross profit............... 69,299 84,724 108,471 134,610 257,863 Operating, selling, general and administrative expenses.................. 52,142 62,687 79,620 97,526 200,962 -------- -------- -------- -------- -------- Operating income........... 17,157 22,037 28,851 37,084 56,901 Other income (expense), net....................... 376 236 1,182 472 (6,958) -------- -------- -------- -------- -------- Income before income taxes. 17,533 22,273 30,033 37,556 49,943 Provision for income taxes. 6,461 8,182 11,062 14,413 19,171 -------- -------- -------- -------- -------- Net income................. $ 11,072 $ 14,091 $ 18,971 $ 23,143 $ 30,772 ======== ======== ======== ======== ======== Net income per common share..................... $ 0.64 $ 0.79 $ 0.91 $ 1.10 $ 1.45 ======== ======== ======== ======== ======== Net income per common share--assuming dilution.. $ 0.64 $ 0.79 $ 0.90 $ 1.09 $ 1.42 ======== ======== ======== ======== ======== Weighted average common shares outstanding........ 17,310 17,820 20,864 21,043 21,238 Weighted average common shares outstanding-- assuming dilution......... 17,389 17,902 21,032 21,277 21,602 Selected Operating Data: Number of stores at beginning of year......... 145 165 188 219 259 Net stores added (a)....... 20 23 31 40 232(b) Number of stores at year end....................... 165 188 219 259 491 Total store square footage at year end (in 000's) (c)....................... 785 923 1,155 1,454 3,172 Weighted average product sales per store (in 000's) (c)....................... $ 1,007 $ 1,101 $ 1,239 $ 1,306 $ 1,368 Percentage increase in same store product sales (d)... 8.9% 8.9% 14.4% 6.8% 6.8% As of December 31, ------------------------------------------------ 1994 1995 1996 1997 1998 (In thousands) Balance Sheet Data: Working capital............ $ 41,416 $ 80,471 $ 74,403 $ 93,763 $208,363 Total assets............... 87,327 153,604 183,623 247,617 493,288 Short-term debt............ 311 231 3,154 130 13,691 Long-term debt, less current portion........... 461 358 237 22,641 170,166 Shareholders' equity....... 70,224 133,870 155,782 182,039 218,394
- --------------------- (a) Two stores were closed during 1997 and one was closed in 1998. Additionally, seven former Hi-Lo stores located in California were sold in 1998. No other stores were closed or sold during the periods presented. (b) Reflects 182 net stores acquired in the Hi-Lo acquisition and 50 net stores opened. (c) Total square footage includes normal selling, office, stockroom and receiving space. Weighted average product sales per store are weighted to consider the approximate dates of store openings. (d) We calculate same store product sales based on the change in product sales of only those stores open during both full periods being compared. We calculate the percentage increase in same store product sales based on store sales results which exclude sales of specialty machinery, sales by outside salesmen and sales to employees. 13 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 prospectus. We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both DIY customers and professional installers. Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items and accessories, and a complete line of autobody paint and related materials, automotive tools and professional service equipment. In January 1998, we acquired Hi-Lo for a cash purchase price of approximately $49.3 million. At the time of the acquisition, Hi-Lo had $43.2 million of existing debt, among other liabilities, which we assumed. Through the Hi-Lo acquisition, we acquired a net of 182 stores and a 425,000 square foot distribution center located in Houston, Texas. We calculate same store product sales based on the change in product sales of only those stores open during both full periods being compared. We calculate the percentage increase in same store product sales based on store sales results which exclude sales of specialty machinery, sales by outside salesmen and sales to employees. Cost of goods sold consists primarily of product costs and warehouse and distribution expenses. Cost of goods sold as a percentage of product sales may be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs. Operating, selling, general and administrative expenses consist primarily of store payroll, store occupancy, advertising expenses, other store expenses and general and administrative expenses, including salaries and related benefits of corporate employees, administrative office occupancy expenses, data processing, professional expenses and other related expenses. Results of Operations The following table sets forth certain of our summary income statement data as a percentage of product sales for the years indicated:
Years Ended December 31, ---------------------------- 1996 1997 1998 Product sales.............................. 100.0% 100.0% 100.0% Cost of goods sold, including warehouse and distribution expenses..................... 58.2 57.5 58.2 -------- -------- -------- Gross profit............................... 41.8 42.5 41.8 Operating, selling, general and administrative expenses.................................. 30.7 30.8 32.6 -------- -------- -------- Operating income........................... 11.1 11.7 9.2 Other income (expense)..................... 0.5 0.1 (1.1) -------- -------- -------- Income before income taxes................. 11.6 11.8 8.1 Provision for income taxes................. 4.3 4.5 3.1 -------- -------- -------- Net income................................. 7.3% 7.3% 5.0% ======== ======== ========
14 1998 Compared to 1997 Product sales increased $299.9 million, or 94.8% from $316.4 million in 1997 to $616.3 million in 1998 due to 182 net additional stores acquired from Hi-Lo, 50 net additional stores opened during 1998, and a $33.1 million, or 6.8% increase in same store product sales. We believe that the customer acceptance experienced by these new stores and the increased product sales achieved by the existing stores is the result of our offering of a broader selection of stock keeping units in most stores, an increased promotional and advertising effort through a variety of media and localized promotional events, and continued improvement in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to increased sales. Gross profit increased 91.6% from $134.6 million (or 42.5% of product sales) in 1997 to $257.9 million (or 41.8% of product sales) in 1998. The decrease in gross profit margin was primarily attributable to the inclusion of eleven months of Hi-Lo operations, which resulted in a higher cost of sales. The decrease was offset partially by continued improvements in our product acquisition programs and conversions in the product lines in the Hi-Lo stores. Operating, selling, general and administrative expenses increased $103.4 million from $97.5 million (or 30.8% of product sales) in 1997 to $201.0 million (or 32.6% of product sales) in 1998. The increase in these expenses in dollar amount and as a percentage of sales primarily resulted from the Hi-Lo acquisition and net store openings, as well as the addition of team members and facilities to support the increased level of our operations. Other income (expense) decreased by $7.5 million from income of $0.5 million in 1997 to expense of $7.0 million in 1998, primarily due to increased interest expense from higher balances on long-term debt principally resulting from the Hi-Lo acquisition and growth in the scope of our operations. Our provision for income taxes was 38.4% of income before income taxes in 1998 and 1997. Principally as a result of the foregoing, net income in 1998 was $30.8 million, or 5.0% of product sales, an increase of $7.6 million (or 33.0%) from net income in 1997 of $23.1 million, or 7.3% of product sales. 1997 Compared to 1996 Product sales increased $57.2 million, or 22.1%, from $259.2 million in 1996 to $316.4 million in 1997 due to 40 net additional stores opened during 1997 and a $15.6 million, or 6.8%, increase in same store product sales. We believe that the customer acceptance experienced by these new stores and the increased product sales achieved by the existing stores is the result of our continuation of media advertising during 1997 at levels comparable to those set in 1996, an increase in the broad selection of stock keeping units at the newer or recently renovated or relocated stores, the increase in inventory levels at most stores, and the increasing penetration of the general geographic markets in which we operate. Gross profit increased 24.1% from $108.5 million (or 41.8% of product sales) in 1996 to $134.6 million (or 42.5% of product sales) in 1997. The increase in gross profit margin was primarily attributable to lower product costs resulting from our obtaining increased volume discounts and other economies of scale. The increase was partially offset by continued price competition among automotive parts retailers. 15 Operating, selling, general and administrative expenses increased $17.9 million from $79.6 million (or 30.7% of product sales) in 1996 to $97.5 million (or 30.8% of product sales) in 1997. The increased dollar amount of these expenses resulted primarily from the new store openings and additions to administrative staff and facilities which occurred during 1997 in order to support our increased level of operations. Our provision for income taxes increased from 36.8% of income before income taxes in 1996 to 38.4% in 1997. The increase in the effective income tax rate was primarily due to more of our sales occurring in states with higher income tax rates. Additionally, in 1996, interest income of over $400,000 was tax exempt, but all interest income was taxable in 1997. Principally as a result of the foregoing, net income in 1997 was $23.1 million, or 7.3% of product sales, an increase of $4.1 million (or 21.6%) from net income in 1996 of $19.0 million, or 7.3% of product sales. Liquidity and Capital Resources Net cash provided by operating activities was $4.9 million in 1996 and $17.9 million in 1997. Net cash used in operating activities was $19.1 million in 1998. The increase in 1997 compared to 1996 is principally the result of increases in net income and accounts payable and accrued expenses, partially offset by an increase in inventory. The increase in inventory is due to the addition in 1997 of 40 net stores and an increase in inventory levels at most stores and the distribution centers. The net cash used in operating activities in 1998 is principally the result of increases in inventory, amounts receivable from vendors, refundable income taxes, accounts receivable and accrued payroll, net of increases in accounts payable and deferred income taxes. The increase in inventory is due to the addition of 50 net stores, an increase in inventory levels at many stores particularly the acquired Hi-Lo stores and increases in inventory at the Oklahoma City distribution center, due to its expansion, and the Houston distribution center, to improve order fill and service levels. Net cash used in investing activities was $11.2 million in 1996, $37.7 million in 1997 and $100.8 million in 1998. The increase in cash used in 1997 was primarily due to increased capital expenditures without any offsetting proceeds from the sale of short-term investments. The increase in cash used in 1998 was primarily due to the purchase of Hi-Lo and increased capital expenditures. Capital expenditures were $34.5 million in 1996, $37.2 million in 1997 and $57.7 million in 1998. These expenditures were primarily related to the opening of new stores as well as the relocation or remodeling of existing stores. We opened 31 new stores and remodeled or relocated 32 stores in 1996. In 1997, we opened 40 net stores and remodeled or relocated 28 stores. In 1998, we opened 50 net stores and renovated or relocated 18 stores. Also, in 1996, 1997 and 1998, we purchased real estate for new stores and store relocations totaling approximately $7.8 million, $8.1 million and $9.9 million, respectively. In 1997, we purchased real estate for the Des Moines distribution center totaling $0.7 million. Construction costs for the Des Moines distribution center, which is scheduled to be completed in April 1999, totaled $3.7 million at December 31, 1998. Our continuing store expansion program requires significant capital expenditures and working capital principally for inventory requirements. The costs associated with the opening of a new store (including the cost of land acquisition, improvements, fixtures, inventory and computer equipment) are estimated to average approximately $900,000 to $1.1 million; however, such costs may be 16 significantly reduced where we lease, rather than purchase, the store site. Although the cost to acquire the business of an independently owned parts store varies, depending primarily upon the amount of inventory and the amount, if any, of real estate being acquired, we estimate that the average cost to acquire such a business and convert it to one of our stores is approximately $400,000. We plan to finance our expansion program through cash expected to be provided from operating activities and available borrowings, after the application of the proceeds from this offering. On July 8, 1997, our Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend to all shareholders of record as of July 31, 1997. The stock dividend was paid on August 31, 1997. In order to fund the Hi-Lo acquisition, our continuing store expansion program, and our working capital and general corporate needs, we replaced our lines of credit in January 1998 with an unsecured, five-year syndicated credit facility totaling $173 million. The facility is comprised of a $125 million revolving loan, a $5 million sublimit for the issuance of letters of credit and a $48 million term loan. This credit facility is guaranteed by our subsidiaries. At December 31, 1998, the effective interest rate on the revolving and term loan portions, which each mature on January 27, 2003, was 6.22% per annum. At December 31, 1998, there were no borrowings available under this credit facility. In January 1999, we amended the above credit facility to increase the amount available under the revolving facility by $35 million. The additional $35 million is available until July 31, 1999 or until a "capital markets event" occurs. We believe that this offering will constitute a capital markets event. The additional $35 million bears interest at the same rate as the revolving credit facility discussed above. We believe that the proceeds from this offering, combined with our existing cash, short-term investments, cash expected to be provided by operating activities, available bank credit facilities and trade credit will be sufficient to fund both our short and long-term capital needs for the foreseeable future. Inflation and Seasonality We succeeded, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. As a result, we do not believe that our operations have been materially affected by inflation. Our business is somewhat seasonal primarily as a result of the impact of weather conditions on store sales. Store sales and profits have historically been higher in the second and third quarters (April through September) of each year than in the first and fourth quarters. Quarterly Results The following table sets forth certain quarterly unaudited operating data for fiscal 1997 and 1998. The unaudited quarterly information includes all adjustments which management considers necessary for a fair presentation of the information shown. 17 The unaudited operating data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus, and the other financial information included herein.
Fiscal 1997 ----------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter (In thousands, except per share data) Product sales.............................. $ 68,472 $ 82,448 $ 87,517 $ 77,962 Gross profit............................... 29,191 34,715 36,531 34,173 Operating income........................... 7,928 9,493 10,467 9,196 Net income................................. 5,007 6,082 6,621 5,433 Net income per common share................ 0.24 0.29 0.31 0.26 Net income per common share--assuming dilution.................................. $ 0.24 $ 0.29 $ 0.31 $ 0.25 Fiscal 1998 ----------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter (In thousands, except per share data) Product sales.............................. $118,269 $165,242 $172,784 $160,007 Gross profit............................... 50,669 66,201 69,345 71,648 Operating income........................... 10,602 13,745 15,435 17,119 Net income................................. 5,819 7,672 8,361 8,920 Net income per common share................ 0.28 0.36 0.39 0.42 Net income per common share--assuming dilution.................................. $ 0.27 $ 0.36 $ 0.39 $ 0.41
Year 2000 Issue We have appointed an internal Year 2000 issue project manager and remediation team and have adopted a four phase approach of assessment, remediation, testing and contingency planning. The scope of the project includes our review of all internal software, hardware and operating systems and an assessment of the risk to our business posed by any lack of vendor preparedness with respect to the Year 2000 issue. We have completed the initial assessment of all internal systems, are progressing with the remediation and testing phases, and have begun contingency planning for information technology systems. We believe that this approach of assessment (including prioritization by business risk), remediation (including conversions to new software), testing of necessary changes, and contingency planning will minimize the business risk of the Year 2000 issue from internal systems. We are utilizing internal personnel to correct, replace and test our software and plan to complete the Year 2000 project no later than September 1, 1999. The total cost of the Year 2000 project is estimated at $100,000. Of the total project cost, approximately $25,000 represents the purchase of replacements or upgrades of software and hardware, which will be capitalized. We will expense the remaining portion of the project cost as incurred during 1999. As of December 31, 1998, we had spent approximately $33,060 on the Year 2000 project. We have established ongoing communications with all our significant vendors to monitor their progress in resolving their issues related to the Year 2000 issue. Many of such vendors have informed us that they are making substantial progress in resolving their Year 2000 issue. However, the most likely worst case scenario for us would entail failure of one or more of our significant vendors to continue operations (even temporarily) following transition to the year 2000. We have also contacted suppliers of products significant to our operations containing embedded chips to 18 monitor their progress in resolving issues related to the Year 2000 issue. No material issues have been identified to date as a result of these contacts. We cannot guarantee that our business partners will adequately address issues related to the Year 2000 issue in a timely manner or that the failure of our business partners to correct these issues would not have a material adverse effect on the Company. We have completed contingency plans to be used in the event of a business interruption caused by the Year 2000 issue for some, but not all, of our internal information technology systems. Such plans are being developed for some of our other systems. Elements of our contingency plans include switching vendors and utilizing back-up systems that do not rely on computers. The cost and time estimated for the Year 2000 project are based on our best current estimates. We cannot guarantee that these estimates will be achieved and that planned results will be achieved. New Accounting Standards Recent pronouncements of the FASB, which we were required to adopt in 1998, include SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The adoption of SFAS No. 130 had no effect on our financial statements since we have no items of comprehensive income. SFAS No. 131 supersedes SFAS No. 14 and establishes new standards for the way that public companies report selected information about operating segments in annual financial statements and requires that those companies report selected information about segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 had no effect on our financial statements since we operate in a single segment. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is required to be adopted in years beginning after June 15, 1999. The Company does not anticipate that the adoption of SFAS No. 133 will have a significant effect on the financial position or results of operations of the Company. 19 BUSINESS We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both DIY customers and professional installers. At December 31, 1998 we operated 491 stores in Texas, Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana, Nebraska and Illinois. Our stores carry an extensive product line consisting of: . new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake shoes and pads, chassis parts and engine parts; . maintenance items, such as oil, antifreeze, fluids, engine additives and appearance products; . accessories, such as floor mats and seat covers; and . 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. Our annual product sales increased from $316.4 million in 1997 to $616.3 million in 1998. This increase was primarily the result of our acquisition of Hi-Lo, the opening of 50 net stores and continued strong growth in same store product sales. Our same store product sales at all stores increased by 6.8% for the year and 13.3% for the fourth quarter of 1998. Our net income increased approximately 33% from $23.1 million in 1997 to $30.8 million in 1998. We were founded in 1957 by Charles F. O'Reilly and his son, Charles H. "Chub" O'Reilly, Sr. (one of our current directors), and initially operated from a single store in Springfield, Missouri. The O'Reilly family has managed the Company since our inception, during which time we have experienced continued growth in sales and profitability. 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. 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: . target a larger base of consumers of automotive aftermarket parts; . capitalize on our existing retail and distribution infrastructure; . profitably operate both in large markets and less densely populated geographic areas which typically attract fewer competitors; and . enhance service levels offered to our DIY customers by offering a broad selection of stock keeping units ("SKUs") and extensive product knowledge required by professional installers. We have been committed to a dual market strategy for over 20 years and from the mid-1980's through 1997 derived approximately 50% of our product sales from our DIY customers and approximately 50% from our professional installer customers. As a result of our acquisition of Hi-Lo, which derived approximately 65% of its sales from DIY customers and approximately 35% from professional installers prior to the acquisition, for 1998 we derived approximately 57% of our product sales from our DIY customers and approximately 43% from our professional installer 20 customers. As a result of our historical success in executing our dual market strategy and our over 70 full-time sales representatives dedicated solely to calling upon and selling to the professional installer, we believe we will increase the former Hi-Lo stores' sales to professional installers and have a competitive advantage over our retail competitors who have only recently entered and begun focusing on the professional installer market. Superior Customer Service. We seek to attract new DIY and professional installer customers and to retain existing customers by offering superior customer service, the key elements of which include: . superior in-store service through highly-motivated, technically proficient store personnel ("Professional Parts People") using advanced point-of-sale systems; . an extensive selection of products; . attractive stores in convenient locations; and . competitive pricing, with a low price guarantee. Technically Proficient Professional Parts People. Our highly proficient Professional Parts People provide us with a significant competitive advantage, particularly over less specialized retail operators. We require our Professional Parts People to undergo extensive and ongoing training and to be technically knowledgeable, particularly with respect to hard parts, in order to better serve the technically-oriented professional installers with whom they interact on a daily basis. Such technical proficiency also enhances the customer service we provide to our DIY customers, who appreciate the expert assistance provided by our Professional Parts People. Strategic Distribution Systems. We believe that the geographic concentration of our store network in nine contiguous states and the strategic locations of our four distribution centers enable us to maintain optimum inventory levels throughout our store network. In addition, our inventory management and distribution systems electronically link each of our stores to a distribution center, providing for efficient inventory control and management. Our distribution system provides each of our stores with same day or overnight access to over 100,000 SKUs, many of which are hard to find items not typically stocked by other parts retailers. We believe the availability of a broad range of products is a key competitive advantage in satisfying customer demand and generating repeat business. Experienced Management Team. Our management team has a demonstrated ability to successfully execute our business plan, including the identification and integration of strategic acquisitions. We have experienced 20 consecutive quarters of year-to-year record sales and earnings growth. We have a strong senior management team comprised of 37 professionals who average 20 years of experience with O'Reilly. In addition, our 50 district managers average over 10 years of experience with us. Growth and Expansion Strategies Aggressively Open New Stores. We intend to continue to aggressively open new stores in order to achieve greater penetration in existing markets and to expand into new, contiguous markets. We plan to open approximately 80 stores in 1999 (including a net of seven stores to be acquired from Hinojosa Auto Parts in April 1999) and approximately 100 stores in 2000. Nearly all of the sites for our proposed 1999 store openings and a majority of the sites for our proposed 2000 store openings have been identified. In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies of scale in areas such as management, advertising and distribution. 21 Complete the Integration of Hi-Lo. We expect to continue realizing the benefits of the nearly completed integration of the 182 net stores we acquired through the acquisition of Hi-Lo in January 1998. We have updated the products offered at the Hi-Lo stores with a product mix consistent with our existing stores, converted the Hi-Lo stores to our MIS systems and, in some cases, renovated or relocated Hi-Lo stores. Furthermore, we are increasingly penetrating the professional installer market in Hi-Lo's service areas, and are continuing to benefit from increased leverage in purchasing and reduced overhead expenses. As evidence of our success in integrating Hi-Lo, same store product sales for Hi-Lo stores increased 17.5% in the fourth quarter of 1998 compared to the prior year period. Increase Operating Efficiencies. We believe that as we continue to grow our store network we will increasingly be able to enjoy economies of scale and operating efficiencies, particularly in the areas of purchasing, distribution, inventory management and advertising. 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. In 1998, we renovated or relocated 18 stores, and in 1999 plan to renovate or relocate approximately 19 stores. We believe that our ability to consistently achieve significant growth in same store product sales is due in part to our commitment to maintaining an attractive store network which is strategically located to best serve our customers. Industry Participants in our industry are engaged in the retail sale of automotive aftermarket products. The term aftermarket distinguishes our products from those items sold as part of the original sale of a car or truck. According to industry estimates, in 1997 the size of the automotive aftermarket for replacement parts, maintenance items and accessories was approximately $80 billion. Of this market, approximately $35 billion in sales was to DIY customers and approximately $45 billion in sales was to professional installers. In total, we believe the automotive aftermarket for these products is growing, primarily as a result of increases in: . the size and age of the automotive fleet in the United States; . the number of miles driven annually per vehicle; . the purchase price of new cars; . the cost of replacement parts; . the variety of vehicle types, as well as the sophistication of vehicles; and . labor costs associated with parts installation and maintenance. 22 While we have served the professional installer market since our inception, this market has not traditionally been a focus of our leading retail competitors. However, in the past few years we have seen increasing competition in this market from such competitors. We believe our retail competitors are now recognizing the attractive opportunities represented by the professional installer market. Although our industry continues to be highly fragmented, considerable consolidation has occurred in recent years. As a result of this consolidation, the top 10 industry participants accounted for approximately 21% of the total stores operated by industry participants in 1998 versus 14% in 1995. We believe the industry will continue to consolidate as national and regional specialty chains gain market share at the expense of smaller independent retailers and less specialized mass merchandisers. We believe that companies such as O'Reilly, which have multiple locations in a given market area, are able to achieve operating efficiencies in purchasing, distribution and advertising that smaller competitors cannot achieve. In addition, the significant increase in the variety of vehicle makes and models, as well as the increasing sophistication of vehicles, have increased the number of automotive aftermarket parts which must be carried to satisfy customer demand. We believe that this trend is another factor increasing industry consolidation as larger operators, such as O'Reilly, enjoy competitive advantages in distribution and inventory management systems. The Hi-Lo Acquisition Effective January 31, 1998, we acquired Hi-Lo, a specialty retailer and supplier of automotive aftermarket products headquartered in Houston, Texas. Following the acquisition, we sold seven Hi-Lo stores located in California. Of the 182 stores remaining after such sale, 165 are located in Texas and 17 are located in Louisiana. Through the Hi-Lo acquisition, we also acquired a 425,000 square foot distribution center located in Houston. The Hi-Lo operations are contiguous to our other operations, thereby creating a natural geographic extension of our business. In addition, Hi-Lo was experienced in serving professional installers, deriving approximately 35% of its revenues from such customers. We acquired Hi-Lo for a cash purchase price of approximately $49.3 million. At the time of the acquisition, Hi-Lo had $43.2 million of existing debt, which we assumed. Products Our stores offer DIY and professional installer customers a wide selection of brand name and private label products for domestic and imported automobiles, vans and trucks. We do not sell tires or perform automotive repairs or installations. Our merchandise generally consists of nationally recognized, well advertised, name brand products such as AC Delco, Moog, Wagner, Gates Rubber, Federal Mogul, Monroe, Prestone, Quaker State, Pennzoil, Castrol, Valvoline, STP, Armor All and Turtle Wax. In addition to name brand products, our stores carry a wide variety of high-quality private label products under the Parts Master(R) name brand and our O'Reilly Auto Parts(R), SuperStart(R), BrakeBest(R), Ultima(R) and Omnispark(R) proprietary name brands. Because most of our private label products are produced by nationally recognized manufacturers in accordance with our specifications, we believe that the private label products are generally of equal or, in some cases, better quality than comparable name brand products, a characteristic which is important to our professional installer clientele. We further believe that the private label products are packaged attractively to promote customer interest and are generally priced below comparable name brand products carried in our stores. 23 Store Network Store Locations. As a result of our dual market strategy, we are able to profitably operate in both large, densely populated markets and less densely populated areas which would not otherwise support a national or regional chain selling to just one portion of the automotive aftermarket. The following table sets forth the geographic distribution of our stores:
State Number of Stores Texas.................................................... 174 Missouri................................................. 113 Oklahoma................................................. 87 Kansas................................................... 47 Iowa..................................................... 22 Arkansas................................................. 17 Louisiana................................................ 17 Nebraska................................................. 13 Illinois................................................. 1 --- Total................................................ 491 ===
Our stores on average carry approximately 23,000 SKUs and average approximately 6,500 total square feet in size. Our stores are served primarily by the nearest distribution center, but also have access to the broader selection of inventory available at one of our 49 Master Inventory Stores, which on average carry approximately 40,000 SKUs and are approximately 10,000 square feet in size. Master Inventory Stores, in addition to serving DIY and professional installer customers in their markets, also provide our other stores within their areas access to a greater selection of SKUs on a same day basis. We believe that our stores are "destination stores" generating their own traffic rather than relying on traffic created by the presence of other stores in the immediate vicinity. Consequently, most of our stores are free-standing buildings situated on or near major traffic thoroughfares, and offer ample parking and easy customer access. Store Layout. We utilize a computer-assisted "plan-o-grammed" store layout system to provide a uniform and consistent merchandise presentation; however, some variation occurs in order to meet the specific needs of a particular market area. Merchandise is arranged to provide easy customer access and maximum selling space, keeping high-turnover products and accessories within view of the customer. Aisle displays are generally used to feature high-demand or seasonal merchandise, new items and advertised specials. Store Automation. To enhance store level operations and customer service, we use IBM AS/400 computer systems in all of our stores. These systems are linked with the IBM AS/400 computers located in each of our distribution centers. Our point-of-sale terminals use bar code scanning technology to price our merchandise and provide immediate access to our electronic catalog to display parts and pricing information by make, model and year of vehicle. This system speeds transaction times, reduces register lines and provides enhanced customer service. Moreover, our store automation systems capture sales information which assists in store management, strategic planning, inventory control and distribution efficiency. New Store Site Selection. In selecting sites for new stores, we seek to strategically locate store sites in clusters within geographic areas in order to achieve economies of scale in management, 24 advertising and distribution. 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; and . the number of auto parts stores and other competitors within a pre- determined radius and the operational strength of such competitors. When entering new, more densely populated markets, we generally seek to initially open several stores within a short span of time in order to maximize the effect of initial promotional programs and achieve further economies of scale. After opening this initial cluster of new stores, we seek to begin penetrating the less densely populated surrounding areas. This strategy enables us to achieve additional distribution and advertising efficiencies in each market. Distribution System The following table sets forth the distribution centers we currently operate:
Number of Location Square Footage Stores Served Houston, TX 424,823 183 Springfield, MO 254,720 118 Oklahoma City, OK 238,520 104 Kansas City, MO 128,064 86
In addition, adjacent to the Springfield, Missouri distribution center, we operate a 36,000 square foot bulk merchandise warehouse used for the distribution of bulk products such as motor oil, antifreeze, batteries, lubricants and other fast moving bulk products, and an 18,000 square foot facility where goods to be returned are stored. Our distribution centers are equipped with highly automated conveyor systems which expedite the movement of our products to loading areas for shipment to individual stores on a nightly basis. The distribution centers utilize computer-assisted technology to electronically receive orders from computers located in each of our stores. In addition to the bar code system employed in our stores, we have established a satellite-based data interchange system among those stores in which high-speed data transmission technology is not readily available, the distribution center which services such stores and our corporate headquarters. We believe that our distribution system assists us in lowering our inventory-carrying costs, improving our store in-stock positions, and controlling and managing our inventory. Moreover, we believe that our expanding network of distribution centers allows us to more efficiently service existing stores, as well as new stores planned for opening in contiguous market areas. Our distribution center expansion strategy also complements our new store opening strategy by supporting newly established clusters of stores located in the regions surrounding each distribution center. As part of our continuing efforts to enhance our distribution network, in 1999 we plan to: . open a distribution center in Des Moines, Iowa; . acquire a distribution center in McAllen, Texas as a result of the planned Hinojosa acquisition; . increase the service radius of the distribution center in Oklahoma City, Oklahoma which we recently expanded; and . implement a new warehouse management system in certain distribution centers which will enhance the efficiency of our distribution network. 25 Marketing Marketing to the DIY Customer. We aggressively promote sales to DIY customers through an extensive advertising program which includes direct mail and newspaper, radio and television advertising in selected markets. We believe that our advertising and promotional activities have resulted in significant name recognition in each of our market areas. Newspaper and radio advertisements are generally directed towards specific product and price promotions, frequently in connection with specific sale events and promotions. To promote sales to car enthusiasts, who we believe on an individual basis spend more on automotive products than the public generally, we sponsor over 35 motorsports shows at over 50 racetracks in nine states, including the O'Reilly Auto Parts Mid-West Outlaw Mini-Sprints and the O'Reilly Oklahoma Legends Dirt racing series, as well as three National Hotrod Racing Association races in Houston and Dallas. We have found that the more progressive marketing concepts utilized in the DIY portion of our business can also be applied to increase sales to our professional installer customers. Marketing to the Professional Installer. We have over 70 full-time O'Reilly sales representatives strategically located in the more densely populated market areas that we serve, and each is dedicated solely to calling upon and selling to the professional installer. Moreover, each district manager and store manager throughout our store network calls upon existing and potential new professional installer customers on a regular basis. Our marketing strategy with respect to professional installers emphasizes our ability to offer: . prompt delivery using small trucks or vans operated by most of our stores; . a separate counter in most of our stores dedicated exclusively to serving professional installers; . trade credit for qualified professional installers; . broad inventory of merchandise and competitive pricing; . a professional installer computer system that connects directly to our inventory system; and . seminars concerning topics of interest to professional installers, such as technical updates, safety and general business management. Management Structure Each of our stores is staffed with a store manager and an assistant manager, in addition to the parts specialists and support staff required to meet the specific needs of each store. Each of our 50 district managers has general supervisory responsibility for an average of 10 stores within such manager's district. Each district manager receives comprehensive training on a monthly basis focusing on management techniques, new product announcements, advanced automotive systems and our policies and procedures. In turn, the information covered at such monthly meetings is discussed in full by district managers at monthly meetings with their store managers. All assistant managers and manager trainees are required to successfully complete a six-month manager development program, which includes 85 hours of classroom and field training, as a prerequisite to becoming a store manager. This program covers operations extensively, as well as principles of successful management. We provide financial incentives to our district managers, store managers, assistant managers and sales specialists through an incentive compensation program. Under our incentive compensation 26 program, base salary is augmented by incentive compensation based upon the achievement of sales and profitability goals. We believe that our incentive compensation program significantly increases the motivation and overall performance of our Professional Parts People and our ability to attract and retain qualified management and other personnel. Most of our current senior management, district managers and store managers were promoted to their positions from within the Company. Our senior management team averages 20 years of experience with the Company and district managers have an average length of service with the Company of over 10 years. Professional Parts People We believe our highly trained team of Professional Parts People is essential in providing superior service both to DIY and professional installer customers. Each of our Professional Parts People is required to be technically proficient in the workings and application of automotive products due to the significant portion of our business represented by the professional installer. In addition, we have found that the typical DIY customer often seeks assistance from sales persons, particularly in connection with the purchase of hard parts. We believe that the ability of our Professional Parts People to provide such assistance to the DIY customer creates a favorable impression during a customer's visit to our store and is a significant factor in generating repeat DIY business. We screen prospective employees, whom we refer to as team members, to identify highly motivated individuals either with experience in automotive parts or repairs, or an aptitude for automotive knowledge. Each person who becomes a team member first participates in an intensive two-day orientation program designed to introduce the team member to our culture and his or her job duties before being assigned specific job responsibilities. The successful completion of additional training is required before a team member is deemed qualified as a parts specialist and thus able to work at the parts counter of one of our stores. All new counter people are required to successfully complete a six-month basic automotive systems training course and are then enrolled in a six-month advanced automotive systems course for certification by the National Institute for Automotive Service Excellence ("ASE"), which administers national exams for various automotive specialties and requires ASE certified specialists to take recertification exams every five years. Each of our stores participates in our sales specialist training program. Under this program, selected team members complete two days of extensive sales call training for business development, after which these team members will spend one day per week calling on existing and new professional installer customers. Additionally, each team member engaged in such sales activities will participate in quarterly advanced training programs for sales and business development. Customer Service We seek to provide our customers with an efficient and pleasant in-store experience by maintaining attractive stores in convenient locations with a wide selection of automotive products. We believe that the satisfaction of DIY and professional installer customers is substantially dependent upon our ability to provide, in a timely fashion, the specific automotive product requested. Accordingly, each O'Reilly store carries a broad selection of automotive products designed to cover a wide range of vehicle specifications. We continuously refine the inventory levels carried in our stores, based in large part on the sales movement shown by our computerized inventory control system and on management's assessment of the changes and trends in the marketplace. 27 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. Purchasing We purchase automotive products from approximately 400 vendors, the five largest of which accounted for approximately 30% of our total purchases in 1998, after giving effect to the consolidation of several of our vendors which occurred towards the end of the year. After such consolidation, our largest vendor in 1998 accounted for approximately 13% of our total purchases and no other vendor accounted for more than 5% of such purchases. We have no long-term contractual purchase commitments with any of our vendors, nor have we experienced difficulty in obtaining satisfactory alternative sources of supply for automotive parts. We believe that alternative supply sources exist at substantially similar costs, for substantially all automotive products that we sell. It is our policy to take advantage of early payment and seasonal purchasing discounts offered by our vendors, and to utilize extended dating terms available from vendors due to volume purchasing. We consider our relationships with our suppliers to be good. Competition We compete in both the DIY and professional installer portions of the automotive aftermarket. We compete primarily with: . national and regional retail automotive parts chains (such as AutoZone, Inc., Advance Auto Parts and The Pep Boys-Manny, Moe and Jack, Inc.); . independently owned parts stores; . wholesalers or jobber stores (some of which are associated with national automotive parts distributors or associations such as NAPA and CarQuest); . automobile dealers; and . mass merchandisers that carry automotive replacement parts, maintenance items and accessories (such as Wal-Mart Stores, Inc.). We compete on the basis of customer service, which includes merchandise selection and availability, price, helpfulness of store personnel and store layout and location. Team Members As of December 31, 1998, we had 6,330 full-time team members and 1,547 part- time team members, of whom 6,081 were employed at our stores, 1,244 were employed at our distribution centers and 552 were employed at our corporate and administrative headquarters. Our team members are not subject to a collective bargaining agreement. We consider our relations with our team members to be excellent, and strive to promote good relations with our team members through various programs designed for such purposes. 28 Properties The following table provides certain information regarding our administrative offices and distribution centers and offices as of December 31, 1998:
Square Location Principal Use(s) Footage Interest Springfield, MO Distribution Center and Corporate Offices 274,920 Owned Springfield, MO Corporate Offices, Training and Technical Center 35,580 Leased(a) Springfield, MO Corporate Offices 13,780 Leased(b) Kansas City, MO Distribution Center and Offices 130,662 Owned Oklahoma City, OK Distribution Center and Offices 244,460 Owned Houston, TX Distribution Center and Offices 446,104 Owned
- --------------------- (a) Occupied under the terms of a lease expiring in 2007 with an unaffiliated party, subject to renewal for three five-year terms at our option. To facilitate construction, we loaned to the owner of the facility an aggregate of approximately $2.5 million. The principal balance of such loan bears interest at a rate of 6% per annum, is payable in equal monthly installments through January 2005 and is secured by a first deed of trust. (b) Occupied under the terms of a lease with an unaffiliated party expiring March 31, 2001. Of the 491 stores that we operated at December 31, 1998, 253 stores were owned, 185 stores were leased from unaffiliated parties and 53 stores were leased from one of two real estate investment partnerships formed by the O'Reilly family. Leases with unaffiliated parties generally provide for payment of a fixed base rent, payment of certain tax, insurance and maintenance expenses, and an original term of 10 years, subject to one or more renewals at our option. The original terms of 16 stores leased from unaffiliated parties expire prior to the end of 1999. We have entered into separate master lease agreements with each of the affiliated real estate investment partnerships for the occupancy of the stores covered thereby. Such master lease agreements expired on December 31, 1998 and were renewed through December 31, 2004. We believe that the lease agreements with the affiliated real estate investment partnerships are on terms comparable to those obtainable from third parties. We believe that our present facilities are in good condition, are adequately insured and together with those under construction, are suitable and adequate for the conduct of our current operations. Servicemarks and Trademarks We have registered the servicemarks O'Reilly Automotive(R), O'Reilly Auto Parts(R), Because It's Your Car We're Talking About(R) and Parts Payoff(R) and the trademarks SuperStart(R), BrakeBest(R), Omnispark(R) and First Call(R). Further, we are licensed to use the registered trademarks and servicemarks Auto Value(R) and Parts Master(R) owned by Auto Value Associates in connection with our marketing program. We believe that our business is not otherwise dependent upon any patent, trademark, servicemark or copyright. Legal Proceedings We are currently involved in litigation as a result of a complaint filed against Hi-Lo in May 1997 by Charles Beresky. The plaintiff in this lawsuit sought to certify a class action on behalf of persons or entities in the States of Texas, Louisiana and California that have purchased a battery from Hi-Lo since May 1990. The complaint alleges that Hi-Lo offered and sold "old," "used" and "out of warranty" batteries as if the batteries were new, resulting in claims for violations of deceptive trade practices, breach of contract, negligence, fraud, negligent misrepresentation and 29 breach of warranty. The plaintiff is seeking, on behalf of the class, an unspecified amount of compensatory and punitive damages, as well as attorneys' fees and pre- and post-judgment interest. On July 27, 1998, the Trial Court certified this class. We appealed the decision to certify the class in the Court of Appeals for the Ninth District of Texas. On February 25, 1999, the Court of Appeals issued an opinion affirming the Trial Court's decision to certify the class. We intend to contest this ruling by seeking a mandamus from the Supreme Court of Texas. We believe that the accusations made in this case are unfounded, and intend to defend this lawsuit vigorously. Although the extent of damages suffered by any member of the class is arguably minimal, it is difficult at this stage of the case to determine the likely outcome of the case or to quantify the risk that we face from this litigation. In addition, we and our subsidiaries are involved in various other legal proceedings incidental to the conduct of our business. Although we cannot ascertain the amount of liability that we may incur from any of these matters, we do not currently believe that, in the aggregate, they will have a material adverse effect on our consolidated financial position, results of operations or cash flow. Regulation Although subject to various laws and governmental regulations relating to our business, including those related to the environment, we do not believe that compliance with such laws and regulations has a material adverse effect on our operations. Further, we are unaware of any failure to comply with any such laws and regulations which could have a material adverse effect on our operations. No assurance can be given, however, that significant expenses would not be incurred by us to comply with any such law or regulation in the future. 30 MANAGEMENT Directors and Executive Officers The following table sets forth certain information with respect to our directors and executive officers:
Name Age Position Charles H. O'Reilly, Sr. . 86 Chairman Emeritus and Director Charles H. O'Reilly, Jr. . 58 Chairman of the Board and Director David E. O'Reilly......... 49 President, Chief Executive Officer and Director Lawrence P. O'Reilly...... 52 President, Chief Operating Officer and Director Rosalie O'Reilly Wooten... 56 Executive Vice-President and Director Ted F. Wise............... 48 Executive Vice-President James R. Batten........... 36 Vice-President of Finance, Chief Financial Officer and Treasurer Jay Burchfield............ 52 Director Joe C. Greene............. 62 Director
Charles H. O'Reilly, Sr. is the father of Charles H. O'Reilly, Jr., David E. O'Reilly, Lawrence P. O'Reilly and Rosalie O'Reilly Wooten. Set forth below are descriptions of the backgrounds of our executive officers and directors. Charles H. O'Reilly, Sr. is our co-founder and has served as a director since 1957. Prior to assuming the position of Chairman Emeritus in March 1993, Mr. O'Reilly was our Chairman of the Board, a position he held since 1975. Charles H. O'Reilly, Jr. has served as a director since 1966 and as Chairman of the Board of Directors since March 1993. Mr. O'Reilly had served as our President from 1975 until being elected to his current position. David E. O'Reilly has served as a director since 1972 and as President and Chief Executive Officer since March 1993. Mr. O'Reilly served as a Vice- President from 1975 until being elected to his current position. Mr. O'Reilly also serves as a director of Auto Value Associates, Inc., an industry trade association and buying group in which we are a shareholder. Lawrence P. O'Reilly has served as a director since joining us in 1968, and as President and Chief Operating Officer since March 1993. Mr. O'Reilly served as a Vice-President from 1979 until being elected to his current position. Rosalie O'Reilly Wooten has served as a director and as Executive Vice- President since 1980. Ted F. Wise has served as Executive Vice-President since February 1997. Mr. Wise served as our Senior Vice-President from March 1993 until being elected to his current position. James R. Batten, CPA, has served as Chief Financial Officer and Treasurer since March 1994 and, in addition, as Vice-President of Finance since October 1997. Mr. Batten served as our Finance Manager from January 1993 until being elected to his current position. From September 1986 until joining us in January 1993, Mr. Batten was employed by the accounting firm of Whitlock, Selim & Keehn. 31 Jay Burchfield has served as a director since August 1997. Mr. Burchfield has served as the Chairman of the Board and a director of City Bancorp in Springfield, Missouri from January 1997 to present. He was Chairman of the Board and Chief Executive Officer of Boatmen's National Bank of Oklahoma in Tulsa, Oklahoma from January 1996 to January 1997 and Chairman, President and Chief Executive Officer of Boatmen's Bank of Southern Missouri in Springfield, Missouri from April 1987 to 1996. Mr. Burchfield's career has spanned more than 24 years in the banking industry. Joe C. Greene has served as a director since February 1993. Mr. Greene is the managing partner of Greene & Curtis, a Springfield, Missouri law firm, and has been engaged in the practice of law for over 30 years. 32 SELLING SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of our common stock as of February 28, 1999, and as adjusted to reflect the sale of shares of common stock offered hereby, with respect to each selling shareholder. We believe that the beneficial owners set forth in the table have sole voting and investment power, except as otherwise stated in the notes to the table.
Shares Owned Shares Owned Prior to the After the Offering Offering -------------------- Shares ----------------- Number Percent Offered Number Percent Charles H. O'Reilly, Jr...... 1,511,207(a) 7.0% 250,000(b) 1,261,207 5.1% Lawrence P. O'Reilly......... 1,929,717(c) 9.0 195,000(d) 1,734,717 7.0 David E. O'Reilly............ 1,865,569(e) 8.7 150,000(f) 1,715,569 6.9 Rosalie O'Reilly Wooten...... 1,324,138(g) 6.2 140,000(h) 1,184,138 4.8 Charles H. O'Reilly, Sr. Irrev. Trust FBO Lindsay Sarah O'Reilly.............. 304,848 1.4 60,000 244,848 1.0 Charles H. O'Reilly, Sr. Irrev. Trust FBO Charles R. Wooten...................... 248,293 1.2 50,000 198,293 * Charles H. O'Reilly Sr. Irrev. Trust FBO Carrie E. Wooten...................... 248,293 1.2 50,000 198,293 * Charles H. O'Reilly, Sr. Trust FBO Ryan C. O'Reilly.. 311,530 1.5 50,000 261,530 1.1 Charles H. O'Reilly, Sr. Irrev. Trust FBO Austin David Lee O'Reilly.......... 445,318 2.1 45,000 400,318 1.6 Charles H. O'Reilly, Sr. Irrev. Trust FBO Matthew David O'Reilly.............. 346,902 1.6 45,000 301,902 1.2 Lauren P. O'Reilly........... 326,494 1.5 35,000 291,494 1.2 Leigh Anne O'Reilly Flisher.. 203,497 1.0 35,000 168,497 * Lawrence P. O'Reilly, Custodian, Ragan O'Reilly UTMA/MO..................... 96,632 * 35,000 61,632 *
- --------------------- *Less than one percent. (a) The stated number of shares includes 595,148 shares held through the Charles H. O'Reilly, Jr. Rev. Trust, 515,265 shares controlled by Mr. O'Reilly as trustee of a trust for the benefit of his children, 63,564 shares held by Mr. O'Reilly as custodian for his son, 196,418 shares controlled by Mr. O'Reilly's wife pursuant to a voting trust, 35,000 shares controlled by Mr. O'Reilly as a general partner of a family limited partnership, 2,062 shares held in the O'Reilly Employee Savings Plus Plan with Bankers Trust as trustee and 103,750 shares subject to options exercisable within 60 days of February 28, 1999. (b) Includes 150,000 shares being sold by the Charles H. O'Reilly, Jr. Trust, Charles H. O'Reilly, Jr. Trustee, and 100,000 shares to be received following the exercise of options expiring April 22, 1999. (c) The stated number of shares includes 686,285 shares held through the Lawrence P. O'Reilly Rev. Trust, 743,189 shares controlled by Mr. O'Reilly as trustee of a trust for the benefit of his children, 96,632 shares held by Mr. O'Reilly as custodian for his daughter, 253,894 shares controlled by Mr. O'Reilly's wife pursuant to a voting trust, 2,217 shares held in the O'Reilly Employee Savings Plus Plan and 147,500 shares subject to options exercisable within 60 days of February 28, 1999. (d) Includes 95,000 shares being sold by the Lawrence P. O'Reilly Rev. Trust, Lawrence P. O'Reilly, Trustee, and 100,000 shares to be received following the exercise of options expiring April 22, 1999. (e) The stated number of shares includes 381,279 shares held through the David O'Reilly, Rev. Trust, 1,097,068 shares controlled by Mr. O'Reilly as trustee of two trusts for the benefit of his children, 238,406 shares held by Mr. O'Reilly as custodian for two of his children, 1,316 shares held in the O'Reilly Employee Savings Plus Plan and 147,500 shares subject to options exercisable within 60 days of February 28, 1999. (f) Includes 50,000 shares being sold by the David O'Reilly Rev. Trust, David O'Reilly, Trustee and 100,000 shares to be received following the exercise of options expiring April 22, 1999. 33 (g) The stated number of shares includes 471,389 shares held through the Rosalie O'Reilly Wooten Rev. Trust, 496,586 shares controlled by Mrs. Wooten as trustee of a trust for the benefit of her children, 135,230 shares held by Mrs. Wooten as custodian for her daughter, 176,394 shares controlled by Mrs. Wooten's husband as trustee for the benefit of Mrs. Wooten's children and their descendants, 1,277 shares held in the O'Reilly Employee Savings Plus Plan and 43,750 shares subject to options exercisable within 60 days of February 28, 1999. (h) Includes 100,000 shares being sold by the Rosalie O'Reilly Wooten Rev. Trust, Rosalie O'Reilly Wooten, Trustee, and 40,000 shares to be received following the exercise of options expiring April 22, 1999. 34 DESCRIPTION OF CAPITAL STOCK Authorized and Outstanding Capital Stock Our Restated Articles of Incorporation ("Articles") provide for an authorized capital of 35,000,000 shares consisting of 5,000,000 shares of preferred stock, $0.01 par value per share, and 30,000,000 shares of common stock, $0.01 par value per share. Based on shares outstanding as of December 31, 1998 plus 340,000 shares underlying options to be exercised in connection with this offering, upon the consummation of this offering, 24,689,700 shares of common stock and no shares of preferred stock will be outstanding. At our regularly scheduled annual meeting on May 4, 1999, we will seek shareholder approval of a proposal to increase the number of shares of common stock authorized from 30 million to 90 million. The following summary description of our capital stock is qualified in its entirety by reference to the Articles, a copy of which is filed as an exhibit to the registration statement of which this prospectus is a part. Common Stock The holders of common stock are entitled to cast one vote for each share held of record on all matters to be voted on by shareholders, including the election of directors. There is no cumulative voting with respect to the election of directors. As a result, the holders of common stock entitled to exercise more than 50% of the voting rights in an election of directors can elect all of the directors then standing for election if they choose to do so. Our Articles and Bylaws provide for a classified board of directors with three classes serving staggered three-year terms so that approximately one-third of the directors will be elected at each annual meeting. This provision could have the effect of delaying, deferring or preventing a change in control of the Company. The holders of common stock are entitled to receive dividends when and if declared by the board of directors out of legally available funds. In the event of liquidation, dissolution or winding up of our affairs, the holders of the common stock are entitled to share ratably in all remaining assets which are available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the common stock. Holders of shares of common stock, as such, have no conversion, pre-emptive or other subscription rights and there are no redemption provisions applicable to the common stock. All of the outstanding shares of common stock are, and the shares of common stock offered hereby will be, when issued for the consideration set forth in this prospectus, fully paid and nonassessable. Preferred Stock The Articles authorize our board of directors to establish one or more series of preferred stock and to determine, with respect to any series of preferred stock, the terms, rights and preferences of such series including voting, dividend, liquidation, conversion and other rights. The authorized shares of preferred stock will be available for issuance without further action by our shareholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded. Although we have no present intent of so doing, we could issue a series of preferred stock that could discourage, impede, delay or prevent a transaction which would result in a change of control of the Company, regardless of whether some of our shareholders might believe such a transaction to be in their best interests. Transfer Agent The transfer agent and registrar for the common stock is UMB Bank N.A., Kansas City, Missouri. 35 UNDERWRITING Subject to the terms and conditions contained in an underwriting agreement dated March , 1999, the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, George K. Baum & Company and William Blair & Company, L.L.C. (the "Representatives"), have severally agreed to purchase from the Company and the selling shareholders the number of shares set forth opposite their names below.
Number of Underwriters: Shares Donaldson, Lufkin & Jenrette Securities Corporation.................. George K. Baum & Company............................................. William Blair & Company, L.L.C....................................... --------- Total............................................................... 4,140,000 =========
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of the shares included in this offering are subject to approval of certain legal matters by their counsel and to certain other conditions. Except for those shares covered by the over- allotment option, the underwriters are obligated to purchase and accept delivery of all the shares if they purchase any of the shares. The over- allotment option is discussed below. The underwriters propose to initially offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to certain dealers at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share on sales to certain other dealers. After the initial offering of the shares to the public, the underwriters may change the public offering price and such concessions. The Company has granted the underwriters an option, exercisable for 30 days from the date of the underwriting agreement, to purchase up to 621,000 additional shares at the public offering price less the underwriting fees. The underwriters may exercise such option solely to cover over-allotments, if any, made in connection with this offering. To the extent that the underwriters exercise such option, each underwriter will become obligated, subject to certain conditions, to purchase a number of additional shares approximately proportionate to such underwriter's initial purchase commitment. The Company and the selling shareholders have agreed to indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments that the underwriters may be required to make in respect of any of those liabilities. The Company, each of the selling shareholders and the executive officers and directors of the Company have agreed that, for a period of 90 days from the date of this prospectus, they will not, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation: (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or (2) enter into any swap or other arrangement that transfers all or 36 a portion of the economic consequences associated with the ownership of any common stock (regardless of whether any of the transactions described in clause (1) or (2) is to be settled by the delivery of common stock or such other securities, in cash or otherwise). In addition, for a 90 day period the Company has agreed not to file any registration statement with respect to, and each of its executive officers, directors and certain shareholders of the Company (including the selling shareholders) has agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any securities convertible into or exercisable for common stock without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. The Representatives have performed certain investment banking and advisory services for us from time to time for which they have received customary fees and reimbursement of expenses. The Representatives may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business. Other than in the United States, no action has been taken by the Company, the selling shareholders or the underwriters that would permit a public offering of the shares of common stock included in this offering in any jurisdiction where action for that purpose is required. The shares included in this offering may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisement in connection with the offer and sale of any such shares be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of such jurisdiction. Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to the offering of the common stock and the distribution of this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy any shares of common stock included in this offering in any jurisdiction where that would not be permitted or legal. In connection with this offering, certain underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may overallot this offering, creating a syndicate short position. In addition, the underwriters may bid for and purchase shares of common stock in the open market to cover syndicate short positions or to stabilize the price of the common stock. These activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Securities and Exchange Commission allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring to these documents. The information incorporated by reference is considered to be part of this prospectus, and later information that we file with the Commission will automatically update and supercede this information. This prospectus is part of a registration statement that we filed with the Commission. We incorporate by reference the documents listed below and any future filings made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until we sell all of the common stock. . The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997; . The amendment to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1997; 37 . The Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998; . The amendment to the Company's Quarterly Report on Form 10-Q/A for the period ended March 31, 1998; . The Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998; . The Company's Quarterly Report on Form 10-Q for the period ended September 30, 1998; . The Company's Current Report on Form 8-K, filed on February 2, 1998; . The amendment to the Company's Current Report on Form 8-K/A, filed on April 14, 1998; . The Company's definitive proxy statement on Schedule 14A, filed April 6, 1998; and . The description of the common stock contained in the Company's Registration Statement on Form 8-A filed pursuant to Section 12 of the Exchange Act and all amendments thereto and reports filed for the purpose of updating such description. You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: 233 South Patterson, Springfield, MO 65802, Attention Investor Relations, Telephone: (417) 862-6708. ADDITIONAL INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Commission. You may read and copy any document we file at the following locations: . At the Public Reference Room of the Commission, Room 1024-Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549; . At the public reference facilities at the Commission's regional offices at Seven World Trade Center, 13th Floor, New York, New York 10048 or Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; . By writing to the Commission, Public Reference Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549; . At the offices of the National Association of Securities Dealers, Inc., Reports Sections, 1735 K Street, N.W., Washington, DC 20006; or . From the Commission's web site at www.sec.gov. Some of these locations may charge a prescribed or modest fee for copies. The Company has filed with the Commission a Registration Statement on Form S-3 (together with any amendments or supplements thereto, the "Registration Statement") under the Securities Act of 1933, as amended, with respect to the shares of common stock offered hereby. As permitted by the Commission, this prospectus, which constitutes a part of the Registration Statement, does not contain all the information included in the Registration Statement. Such additional information may be obtained from the locations described above. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete. You should refer to the contract or other document for all the details. 38 LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom (Illinois). Skadden, Arps, Slate, Meagher & Flom (Illinois) will rely upon the opinion of Gallop, Johnson & Neuman, L.C., St. Louis, Missouri, as to certain matters of Missouri law. Certain legal matters in connection with this offering will be passed upon for the underwriters by Katten Muchin & Zavis. EXPERTS The consolidated financial statements of O'Reilly Automotive, Inc. and subsidiaries at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, appearing in this prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The consolidated financial statements of O'Reilly Automotive, Inc. incorporated by reference in the O'Reilly Automotive, Inc. Annual Report (Form 10-K) for the year ended December 31, 1997, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon incorporated by reference therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing. The consolidated financial statements of Hi-Lo Automotive, Inc. as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, have been incorporated by reference herein in reliance upon the report of Arthur Andersen, LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. 39 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Auditors............................................. F-3 Audited Consolidated Financial Statements Consolidated Balance Sheets................................................ F-4 Consolidated Statements of Income.......................................... F-6 Consolidated Statements of Shareholders' Equity............................ F-7 Consolidated Statements of Cash Flows...................................... F-8 Notes to Consolidated Financial Statements................................. F-9
F-1 (THIS PAGE INTENTIONALLY LEFT BLANK) F-2 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, 1997 and 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of O'Reilly Automotive, Inc. and Subsidiaries at December 31, 1997 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Kansas City, Missouri March 2, 1999 F-3 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ----------------- 1997 1998 -------- -------- (In thousands, except share data) Assets Current assets: Cash....................................................... $ 2,285 $ 1,728 Short-term investments..................................... 1,000 500 Accounts receivable, less allowance for doubtful accounts of $363 in 1997 and $613 in 1998.......................................... 12,469 27,580 Amounts receivable from vendors............................ 4,969 26,660 Inventory.................................................. 111,848 246,012 Refundable income taxes.................................... -- 3,026 Deferred income taxes...................................... 1,424 2,838 Other current assets....................................... 145 2,538 -------- -------- Total current assets................................... 134,140 310,882 Property and equipment, at cost: Land....................................................... 28,000 40,131 Buildings.................................................. 53,507 81,770 Leasehold improvements..................................... 9,230 17,898 Furniture, fixtures and equipment.......................... 36,362 56,897 Vehicles................................................... 10,434 13,511 -------- -------- 137,533 210,207 Accumulated depreciation and amortization.................. 29,093 39,256 -------- -------- 108,440 170,951 Deferred income taxes........................................ -- 3,178 Notes receivable............................................. 2,280 4,137 Other assets................................................. 2,757 4,140 -------- -------- Total assets........................................... $247,617 $493,288 ======== ========
F-4
December 31, ----------------- 1997 1998 -------- -------- (In thousands, except share data) Liabilities and shareholders' equity Current liabilities: Note payable to bank....................................... $ -- $ 5,000 Accounts payable........................................... 29,713 66,737 Accrued expenses........................................... 6,386 18,446 Accrued payroll............................................ 1,647 3,645 Income taxes payable....................................... 2,501 -- Current portion of long-term debt.......................... 130 8,691 -------- -------- Total current liabilities................................ 40,377 102,519 Long-term debt, less current portion......................... 22,641 170,166 Other liabilities............................................ 415 2,209 Deferred income taxes........................................ 2,145 -- Shareholders' equity: Preferred stock, $.01 par value: Authorized shares--5,000,000 Issued and outstanding shares--none...................... -- -- Common stock, $.01 par value: Authorized shares--30,000,000 Issued and outstanding shares--21,125,493 in 1997 and 21,349,700 in 1998...................................... 211 213 Additional paid-in capital................................. 77,077 82,658 Retained earnings.......................................... 104,751 135,523 -------- -------- Total shareholders' equity............................. 182,039 218,394 -------- -------- Total liabilities and shareholders' equity............. $247,617 $493,288 ======== ========
See accompanying notes. F-5 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, ---------------------------- 1996 1997 1998 -------- -------- -------- (In thousands, except per share data) Product sales.................................... $259,243 $316,399 $616,302 Cost of goods sold, including warehouse and distribution expenses........................... 150,772 181,789 358,439 Operating, selling, general and administrative expenses........................................ 79,620 97,526 200,962 -------- -------- -------- 230,392 279,315 559,401 -------- -------- -------- Operating income................................. 28,851 37,084 56,901 Other income (expense): Interest expense............................... (37) (139) (8,126) Interest income................................ 676 198 396 Other, net..................................... 543 413 772 -------- -------- -------- 1,182 472 (6,958) -------- -------- -------- Income before income taxes....................... 30,033 37,556 49,943 Provision for income taxes....................... 11,062 14,413 19,171 -------- -------- -------- Net income....................................... $ 18,971 $ 23,143 $ 30,772 ======== ======== ======== Basic income per common share: Net income per common share...................... $ 0.91 $ 1.10 $ 1.45 ======== ======== ======== Weighted average common shares outstanding....... 20,864 21,043 21,238 ======== ======== ======== Income per common share--assuming dilution: Net income per common share--assuming dilution... $ 0.90 $ 1.09 $ 1.42 ======== ======== ======== Adjusted weighted average common shares outstanding..................................... 21,032 21,277 21,602 ======== ======== ========
See accompanying notes. F-6 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional ---------------- Paid-In Retained Shares Par Value Capital Earnings Total ------ --------- ---------- -------- -------- (In thousands) Balance at December 31, 1995.... 20,724 $104 $71,024 $ 62,742 $133,870 Issuance of common stock under employee benefit plans....... 93 -- 1,509 -- 1,509 Issuance of common stock under stock option plans........... 120 1 1,431 -- 1,432 Net income.................... -- -- -- 18,971 18,971 ------ ---- ------- -------- -------- Balance at December 31, 1996.... 20,937 105 73,964 81,713 155,782 Two-for-one stock split....... -- 105 -- (105) -- Issuance of common stock under employee benefit plans....... 73 -- 1,331 -- 1,331 Issuance of common stock under stock option plans........... 115 1 1,481 -- 1,482 Tax benefit of stock options exercised.................... -- -- 301 -- 301 Net income.................... -- -- -- 23,143 23,143 ------ ---- ------- -------- -------- Balance at December 31, 1997.... 21,125 211 77,077 104,751 182,039 Issuance of common stock under employee benefit plans....... 92 1 2,720 -- 2,721 Issuance of common stock under stock option plans........... 133 1 2,022 -- 2,023 Tax benefit of stock options exercised.................... -- -- 839 -- 839 Net income.................... -- -- -- 30,772 30,772 ------ ---- ------- -------- -------- Balance at December 31, 1998.... 21,350 $213 $82,658 $135,523 $218,394 ====== ==== ======= ======== ========
See accompanying notes. F-7 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ---------------------------- 1996 1997 1998 -------- -------- -------- (In thousands) Operating activities Net income...................................... $ 18,971 $ 23,143 $ 30,772 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................. 6,105 8,276 12,164 Provision for doubtful accounts............... 592 662 250 Gain on sale of property and equipment........ (281) (44) (134) Deferred income taxes......................... 1,483 (1,042) 7,629 Common stock contributed to employee benefit plans........................................ 1,028 1,331 1,629 Tax benefit of stock options exercised........ -- 301 839 Postretirement benefits....................... 12 12 12 Changes in operating assets and liabilities, net of the effects of the acquisition: Accounts receivable......................... (2,428) (1,835) (5,809) Amounts receivable from vendors............. (473) (2,100) (21,691) Inventory................................... (24,930) (27,939) (53,328) Refundable income taxes..................... 564 172 (5,527) Other current assets........................ 603 (446) (179) Other assets................................ (709) (581) (1,753) Accounts payable............................ 4,275 12,425 20,071 Accrued expenses............................ 830 2,433 (525) Accrued payroll............................. (765) 604 (3,533) Income taxes payable........................ -- 2,501 -- -------- -------- -------- Net cash provided by (used in) operating activities............................... 4,877 17,873 (19,113) Investing activities Purchases of property and equipment............. (34,459) (37,180) (57,732) Acquisition, net of cash acquired............... -- -- (49,296) Proceeds from sale of property and equipment.... 801 293 6,038 Purchases of short-term investments............. (12,494) -- -- Proceeds from sale of short-term investments.... 34,904 -- 500 Payments received on notes receivable........... 51 898 372 Advances made on notes receivable............... (21) (1,668) (650) -------- -------- -------- Net cash used in investing activities..... (11,218) (37,657) (100,768) Financing activities Borrowings on notes payable to bank............. 3,000 -- 5,000 Proceeds from issuance of long-term debt........ -- 20,500 157,860 Principal payments on long-term debt............ (198) (1,120) (46,651) Net proceeds from issuance of common stock...... 1,913 1,482 3,115 -------- -------- -------- Net cash provided by financing activities. 4,715 20,862 119,324 -------- -------- -------- Net increase (decrease) in cash................. (1,626) 1,078 (557) Cash at beginning of year....................... 2,833 1,207 2,285 -------- -------- -------- Cash at end of year............................. $ 1,207 $ 2,285 $ 1,728 ======== ======== ========
See accompanying notes. F-8 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1997 and 1998 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business O'Reilly Automotive, Inc. ("the Company") is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies and accessories to both the "do-it-yourself" customer and the professional installer throughout Texas, Missouri, Oklahoma, Kansas, Iowa, Arkansas, Louisiana, Nebraska and Illinois. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition The Company recognizes sales upon shipment of products. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Inventory Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. Cost has been determined using the last-in, first-out ("LIFO") method. If the first-in, first-out ("FIFO") method of costing inventory had been used by the Company, inventory would have been $119,135,000 and $246,402,000 as of December 31, 1997 and 1998, respectively. Amounts Receivable from Vendors Amounts receivable from vendors consist primarily of amounts due the Company for rebates and other allowances. Property and Equipment Property and equipment are carried at cost. Depreciation is provided on straight-line and accelerated methods over the estimated useful lives of the assets. Service lives for property and equipment generally range from three to 40 years. Leasehold improvements are amortized over the terms of the underlying leases. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included in the determination of net income as a component of other income (expense). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. F-9 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The company capitalizes interest costs as a component of construction in progress, based on the weighted average rates paid for long-term borrowings. Total interest costs capitalized for the years ended December 31, 1997 and 1998, were $527,000 and $1,213,000, respectively. There were no interest costs capitalized during the year ended December 31, 1996. Income Taxes The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109. The liability method provides that deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Advertising Costs The Company expenses advertising costs as incurred. Advertising expense charged to operations amounted to $3,156,000, $3,437,000 and $8,326,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Financial Instrument The Company utilizes interest rate swap agreements to manage interest rate risk on its floating rate debt. During 1998, the Company entered into an interest-rate swap agreement to modify the interest characteristics of its outstanding long-term debt from a floating rate to a fixed rate basis. This agreement involves the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. The related amount payable to or receivable from the counterparty is included in other liabilities or assets. The fair value of the swap agreement is not recognized in the consolidated financial statements and approximates its carrying cost. Preopening Costs Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to operations as incurred. Stock Option Plans The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed in Note 11, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. F-10 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Concentration of Credit Risk The Company grants credit to certain customers who meet the Company's pre- established credit requirements. Generally, the Company does not require security when trade credit is granted to customers. Credit losses are provided for in the Company's consolidated financial statements and consistently have been within management's expectations. The Company has provided long-term financing to a company, through a note receivable, for the construction of an office building which is leased by the Company (see Note 7). The note receivable, amounting to $2,271,000 and $2,203,000 at December 31, 1997 and 1998, respectively, bears interest at 6% and is due in January 2005. The carrying value of the Company's financial instruments, including cash, short-term investments, accounts receivable, accounts payable and long-term debt, as reported in the accompanying consolidated balance sheets, approximates fair value. New Accounting Pronouncements As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" which established new rules for the reporting and display of comprehensive income and its components. SFAS No. 130 had no impact on the Company's financial statements. Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" which established new standards for the way public companies report information about operating segments in annual and interim financial statements. The Company operates in a single segment and accordingly, no segment disclosures are warranted for the years ended December 31, 1996, 1997 and 1998. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is required to be adopted in years beginning after June 15, 1999. The Company does not anticipate that the adoption of SFAS No. 133 will have a significant effect on the financial position or results of operations of the Company. Reclassifications Certain reclassifications have been made to the 1997 and 1996 consolidated financial statements to conform to the 1998 presentation. F-11 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 2--ACQUISITION Effective January 31, 1998, the Company acquired 100% of the outstanding capital stock of Hi-Lo Automotive, Inc. and its subsidiaries (Hi-Lo). Hi-Lo was a specialty retailer supplying automotive aftermarket tools, supplies and accessories principally throughout Texas and Louisiana. The purchase price was approximately $49.3 million, including acquisition costs. The purchase price was financed with long-term borrowings under the Company's credit facility. The acquisition was accounted for using the purchase method of accounting and accordingly, the results of operations of Hi-Lo have been included in the Company's results of operations since the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values. The excess of net assets acquired over the purchase price, which totaled approximately $9.7 million, has been applied as a reduction to the acquired property and equipment. Additional purchase liabilities recorded included approximately $5,622,000 for severance and certain costs associated with the closure and consolidation of certain acquired stores. At December 31, 1998, approximately $2,005,000 of the consolidation related costs remained on the accompanying balance sheet. The Company expects to complete its consolidation of facilities during 1999. The following unaudited pro forma financial information presents the combined historical results of the Company and Hi-Lo as if the acquisition had occurred at the beginning of 1997 and 1998, after giving effect to certain adjustments, including the application of the excess of net assets acquired over the purchase price to the acquired property and equipment and resulting effect on depreciation, increased interest expense on long-term debt related to the acquisition, and the related income tax effects.
1997 1998 --------- --------- (In thousands, except per share data) Product sales........................................ $ 554,719 $ 634,072 Net income........................................... $ 22,782 $ 29,443 Net income per share--assuming dilution.............. $ 1.07 $ 1.36
The pro forma combined results are not necessarily indicative of the results that would have occurred if the acquisition had been completed as of the beginning of each of the years presented, nor are they necessarily indicative of future consolidated results. NOTE 3--SHORT-TERM INVESTMENTS The Company's short-term investments are classified as available-for-sale in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and are carried at cost, which approximates fair market value. At December 31, 1997 and 1998, short-term investments consisted of preferred equity securities. NOTE 4--RELATED PARTIES The Company leases certain land and buildings related to its O'Reilly Auto Parts stores under six-year operating lease agreements with O'Reilly Investment Company and O'Reilly Real Estate Company, partnerships in which certain shareholders of the Company are partners. Generally, these lease agreements provide for renewal options for an additional six years at the option of the Company (see Note 7). Rent expense under these operating leases totaled $1,729,000 in 1996, $2,122,000 in 1997 and $2,158,000 in 1998. F-12 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 5--NOTE PAYABLE TO BANK The Company had available a short-term unsecured bank line of credit providing for maximum borrowings of $5,000,000, all of which was outstanding at December 31, 1998. There were no borrowings outstanding at December 31, 1997. The line of credit bears interest at LIBOR plus 1.00% (6.63% at December 31, 1998). The line of credit was renewed and extended at January 28, 1999, and expires on April 28, 1999. NOTE 6--LONG-TERM DEBT At December 31, 1998, the Company had available a credit facility providing for maximum borrowings of $173 million. The facility is comprised of a revolving credit facility of $125 million, and a term loan of $48 million. At December 31, 1998, $121,401,000 of the revolving credit facility and $48 million of the term loan was outstanding. The credit facility, which bears interest at LIBOR plus 0.50% (6.22% at December 31, 1998), expires in January 2003. In January 1999, the Company amended the credit facility to increase the amount of available borrowings under the revolving credit facility by $35 million (see Note 16). In addition, the Company had outstanding borrowings totaling $7,705,000 under its non-binding advised line of credit at December 31, 1998. This line of credit, which bears interest at 6.6%, was refinanced in connection with the Company's amendment of its credit facility in January 1999. At December 31, 1997, the Company had outstanding borrowings under its then existing revolving credit facilities amounting to $22,500,000. During 1998, the Company leased certain office equipment under capitalized leases. Pursuant to the terms of the lease agreements, the Company has committed to pay approximately $57,000 per month over three years. The present value of the future minimum lease payments under these agreements totaled $1,496,000 at December 31, 1998, which has been classified as long-term debt in the accompanying consolidated financial statements. Additionally, the Company has various unsecured notes payable to individuals, amounting to $271,000 and $255,032, at December 31, 1997 and 1998, respectively. The notes bear interest at rates ranging from 8% to 9% and are due in monthly installments of approximately $2,600 including interest. The notes mature in varying amounts between 1999 and 2000. Indirect borrowings under letters of credit and guarantees of indebtedness of others totaled $633,000 and $1,990,000 at December 31, 1997 and 1998, respectively. Principal maturities of long-term debt for each of the next five years ending December 31 are as follows (amounts in thousands): 1999................................ $ 8,691 2000................................ 13,164 2001................................ 12,657 2002................................ 15,011 2003................................ 129,118 Thereafter.......................... 216 -------- $178,857 ========
F-13 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Cash paid by the Company for interest during the years ended December 31, 1996, 1997 and 1998 amounted to $35,000, $642,000 and $8,509,000, respectively. NOTE 7--COMMITMENTS Lease Commitments The Company leases certain office space, property and equipment under long- term, noncancelable operating leases. Future minimum rental payments, including commitments of $2,250,200 per year through 2004 in connection with the related- party leases described in Note 4, for each of the next five years ending December 31 and in the aggregate are as follows (amounts in thousands):
1999............................. $11,824 2000............................. 10,695 2001............................. 10,281 2002............................. 9,030 2003............................. 7,675 Thereafter....................... 34,000 ------- $83,505 =======
A portion of the Company's retail stores and certain equipment are leased. Most of these leases include renewal options and some include options to purchase and provisions for percentage rent based on sales. Rental expense amounted to $3,348,000, $4,136,000 and $13,862,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Other Commitments During October 1998, the Company announced that it had entered into a definitive agreement to purchase substantially all of the assets of Hinojosa Auto Parts ("Hinojosa") effective April 1, 1999. Hinojosa is a specialty retailer of auto parts which operates 10 stores and a distribution center in the Rio Grande Valley along the Texas/Mexico border. Under the terms of the agreement, the Company will pay approximately $6 million in cash. The Company will not assume any liabilities of Hinojosa. The Company also had construction commitments which totaled approximately $12.4 million at December 31, 1998. NOTE 8--LEGAL PROCEEDINGS The Company is currently involved in litigation as a result of a complaint filed against Hi-Lo in May 1997. The plaintiff in this lawsuit sought to certify a class action on behalf of persons or entities in the states of Texas, Louisiana and California that have purchased a battery from Hi-Lo since May 1990. The complaint alleges that Hi-Lo offered and sold "old," "used" and "out of warranty" batteries as if the batteries were new, resulting in claims for violations of deceptive trade practices, F-14 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) breach of contract, negligence, fraud, negligent misrepresentation and breach of warranty. The plaintiff is seeking, on behalf of the class, an unspecified amount of compensatory and punitive damages, as well as attorneys' fees and pre- and post-judgment interest. On July 27, 1998, the Trial Court certified this class. The Company appealed the decision to certify the class in the Court of Appeals for the Ninth District of Texas. On February 25, 1999, the Court of Appeals issued an opinion affirming the Trial Court's decision to certify the class. The Company intends to contest this ruling by seeking a mandamus from the Supreme Court of Texas. The Company believes that the accusations made in this case are unfounded, and intends to defend this lawsuit vigorously. Although it is difficult at this stage to determine the likely outcome of the case, the Company believes that this lawsuit will not have a material adverse effect on the Company's results of operations or financial position. In addition, the Company and its subsidiaries are involved in various other legal proceedings incidental to the conduct of its business. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, they will have a material adverse effect on the consolidated financial position, results of operations or cash flow of the Company. NOTE 9--INTEREST RATE RISK MANAGEMENT During 1998, the Company entered into an interest rate swap agreement to effectively convert a portion of its floating rate long term debt to a fixed rate basis, thereby reducing the impact of interest rate changes on future income. Pursuant to this pay-fixed swap agreement, the Company agreed to exchange, at specified intervals, the difference between the fixed and the floating interest amounts calculated on the notional amount of the swap agreement which totaled $100 million at December 31, 1998. The Company's fixed interest rate under the swap agreement was 5.69% and the counterparty's floating rate was 5.45% at December 31, 1998. NOTE 10--EMPLOYEE BENEFIT PLANS The Company sponsors a contributory profit sharing and savings plan that covers substantially all employees who are 21 years of age with at least six months of service. Employees may contribute up to 15% of their annual compensation subject to Internal Revenue Code maximum limitations. The Company has agreed to make matching contributions equal to 50% of the first 2% of each employee's contribution and 25% of the next 2% of each employee's contribution. Additional contributions to the plan may be made as determined annually by the Board of Directors. After three years of service, Company contributions and earnings thereon vest at the rate of 20% per year of service with the Company. Company contributions charged to operations amounted to $1,229,000 in 1996, $1,485,000 in 1997 and $1,818,000 in 1998. Company contributions, in the form of common stock, to the profit-sharing and savings plan to match employee contributions during the years ended December 31 were as follows:
Year Market Contributed Shares Value ----------- ------ -------- 1996 19,786 $344,000 1997 20,913 415,000 1998 15,719 514,000
F-15 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Profit-sharing contributions accrued at December 31, 1996, 1997 and 1998 were funded in the next year through issuance of shares of the Company's common stock as follows:
Year Market Funded Shares Value ------ ------ ---------- 1996 39,652 $ 684,000 1997 49,540 884,000 1998 36,193 1,070,000
The Company also sponsors an unfunded noncontributory defined benefit health care plan, which provides certain health benefits to retired employees. According to the terms of this plan, retirees' annual benefits are limited to $1,000 per employee starting at age 66 for employees with 20 or more years of service. Postretirement benefit costs for each of the years ended December 31, 1996, 1997 and 1998 amounted to $12,000. Additionally, the Company has adopted a stock purchase plan under which 500,000 shares of common stock are reserved for future issuance. Under the plan, substantially all employees and non-employee directors have the right to purchase shares of the Company's common stock monthly at a price equal to 85% of the fair market value of the stock. Under the plan, 32,936 shares were issued at an average price of $14.61 per share during 1996, 32,584 shares were issued at an average price $17.49 per share during 1997 and 37,316 shares were issued at an average price of $30.09 per share during 1998. The Company adopted a performance incentive plan for the Company's senior management under which 200,000 shares of restricted stock are reserved for future issuance. Under the plan, 556, 1,386 and 2,679 shares were issued during 1996, 1997 and 1998, respectively. NOTE 11--STOCK OPTION PLANS The Company has a stock option plan under which incentive stock options or nonqualified stock options may be granted to officers and key employees. An aggregate of 3,000,000 shares of common stock is reserved for future issuance under this plan. The exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and the options will expire no later than 10 years from the date of grant. Options granted pursuant to the plan become exercisable no sooner than six months from the date of grant. In the case of a stockholder owning more than 10% of the outstanding stock of the Company, the exercise price of an incentive option may not be less than 110% of the fair market value of the stock on the date of grant, and such options will expire no later than 10 years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable for the first time by any individual in any calendar year may not exceed $100,000. A summary of outstanding stock options is as follows:
Price per Number Share of Shares ------------- --------- Outstanding at December 31, 1995................. $ 8.75-$16.88 763,000 Granted........................................ 14.38- 20.00 51,500 Exercised...................................... 8.75- 15.50 (120,300) Canceled....................................... 13.25- 19.54 (35,500) --------
F-16 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Price per Number Share of Shares ------------- --------- Outstanding at December 31, 1996................. $ 8.75-$20.00 658,700 Granted........................................ 15.63- 28.00 755,000 Exercised...................................... 8.75- 18.38 (71,500) Canceled....................................... 8.75- 17.88 (6,000) --------- Outstanding at December 31, 1997................. 8.75- 28.00 1,336,200 Granted........................................ 24.75- 45.81 411,875 Exercised...................................... 8.75- 32.13 (119,300) Canceled....................................... 8.75- 41.75 (34,350) Forfeitures.................................... 8.75 (2,500) --------- Outstanding at December 31, 1998................. $12.13-$45.81 1,591,925 =========
Options to purchase 637,700, 521,700 and 799,550 shares of common stock were exercisable at December 31, 1996, 1997 and 1998, respectively. The Company also maintains a stock option plan for non-employee directors of the Company under which 150,000 shares of common stock are reserved for future issuance. All director stock options are granted at fair market value on the date of grant and expire on the earlier of termination of service to the Company as a director or seven years. Options granted under this plan become exercisable six months from the date of grant. A summary of outstanding stock options is as follows:
Number Price per Share of Shares --------------- --------- Outstanding at December 31, 1995................ $ 8.75-$13.50 30,000 Granted....................................... 18.19 10,000 ------- Outstanding at December 31, 1996................ 8.75- 18.19 40,000 Granted....................................... 18.56- 28.88 15,000 Exercised..................................... 8.75- 18.19 (20,000) Canceled...................................... 18.56 (5,000) ------- Outstanding at December 31, 1997................ 8.75- 18.19 30,000 Granted....................................... 27.00 10,000 Exercised..................................... 8.75 (5,000) Canceled...................................... -- -- ------- Outstanding at December 31, 1998................ $13.13-$27.00 35,000 =======
All options under this plan were exercisable at December 31, 1996, 1997 and 1998. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee and non-employee director stock options under the fair value method of that SFAS. The fair values for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996, 1997 and 1998, respectively: risk-free interest rates of 5.39%, 5.53% and 4.74%; volatility factors of the expected market price of the Company's common stock of .200, .200 and .221; and weighted-average expected F-17 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) life of the options of 3.5, 6.4 and 8.0 years. The Company assumed a 0% dividend yield over the expected life of the options. The weighted-average fair values of options granted during the years ended December 31, 1996, 1997 and 1998 were $4.79, $8.28, and $12.88, respectively. The weighted-average remaining contract life at December 31, 1998 for all outstanding options under the Company's stock option plans is 6.95 years. The weighted average exercise price for all outstanding options under the Company's stock option plans was $21.74 at December 31, 1998. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The effects of applying SFAS No. 123 for pro forma disclosures are not likely to be representative of the effects on reported net income or losses for future years. The Company's pro forma information follows:
1996 1997 1998 ------- ------- ------- (In thousands, except per share data) Pro forma net income............................. $18,494 $22,432 $29,242 ======= ======= ======= Pro forma basic net income per share............. $ 0.89 $ 1.07 $ 1.38 ======= ======= ======= Pro forma net income per share-- assuming dilution............................... $ 0.88 $ 1.05 $ 1.35 ======= ======= =======
NOTE 12--INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted income per common share:
Year ended December 31, ----------------------- 1996 1997 1998 ------- ------- ------- (In thousands, except per share data) Numerator (basic and diluted): Net income........................................... $18,971 $23,143 $30,772 ======= ======= ======= Denominator: Denominator for basic income per common share-- Weighted-average shares............................. 20,864 21,043 21,238 Effect of employee stock options (Note 11)........... 168 234 364 ------- ------- ------- Denominator for diluted income per common share adjusted weighted-average shares and assumed conversions......................................... 21,032 21,277 21,602 ======= ======= ======= Basic net income per common share...................... $ 0.91 $ 1.10 $ 1.45 ======= ======= ======= Net income per common share--assuming dilution ........ $ 0.90 $ 1.09 $ 1.42 ======= ======= =======
F-18 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 13--INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows at December 31:
1997 1998 ------ ------ (In thousands) Deferred tax assets: Current: Allowance for doubtful accounts....................... $ 138 $ 225 Vacation accrual...................................... 567 852 Inventory carrying value.............................. 636 -- Other accruals........................................ 83 3,031 ------ ------ 1,424 4,108 Noncurrent: Property and equipment................................ -- 1,843 Other................................................. 158 1,335 ------ ------ 158 3,178 ------ ------ Total deferred tax assets................................. 1,582 7,286 Deferred tax liabilities: Current: Inventory carrying value.............................. -- 1,270 ------ ------ -- 1,270 Noncurrent: Property and equipment................................ 2,273 -- Other accruals........................................ 30 -- ------ ------ Total deferred tax liabilities............................ 2,303 1,270 ------ ------ Net deferred tax assets (liabilities)............... $ (721) $6,016 ====== ======
The provision for income taxes consists of the following:
Current Deferred Total ------- -------- ------- (In thousands) 1996: Federal........................................ $ 8,502 $ 1,316 $ 9,818 State.......................................... 1,077 167 1,244 ------- ------- ------- $ 9,579 $ 1,483 $11,062 ======= ======= ======= 1997: Federal........................................ $13,562 $ (915) $12,647 State.......................................... 1,893 (127) 1,766 ------- ------- ------- $15,455 $(1,042) $14,413 ======= ======= ======= 1998: Federal........................................ $10,386 $ 6,852 $17,238 State.......................................... 1,156 777 1,933 ------- ------- ------- $11,542 $ 7,629 $19,171 ======= ======= =======
F-19 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows:
1996 1997 1998 ------- ------- ------- (In thousands) Federal income taxes at statutory rate........... $10,512 $13,145 $17,480 State income taxes, net of federal tax benefit... 809 1,148 1,256 Other items, net................................. (259) 120 435 ------- ------- ------- $11,062 $14,413 $19,171 ======= ======= =======
The tax benefit associated with the exercise of non-qualified stock options has been reflected as additional paid-in capital in the accompanying consolidated financial statements. During the years ended December 31, 1996, 1997 and 1998, cash paid by the Company for income taxes amounted to $9,015,000, $12,168,000 and $16,229,000, respectively. NOTE 14--STOCK SPLIT On July 8, 1997, the Company's Board of Directors declared a two-for-one stock split to be effected in the form of a 100% stock dividend payable to all shareholders of record as of July 31, 1997. The stock dividend was paid on August 31, 1997. Accordingly, the stock split has been recognized by reclassifying $105,000, the par value of the additional shares resulting from the split, from retained earnings to common stock. All share and per share information included in the accompanying consolidated financial statements has been restated to reflect the retroactive effect of the stock split for all periods presented. NOTE 15--QUARTERLY FINANCIAL DATA--UNAUDITED
First Second Third Fourth Quarter Quarter Quarter Quarter -------- -------- -------- -------- (In thousands, except per share data) Year ended December 31, 1997 Product sales............................. $ 68,472 $ 82,448 $ 87,517 $ 77,962 Gross profit.............................. 29,191 34,715 36,531 34,173 Operating income.......................... 7,928 9,493 10,467 9,196 Net income................................ 5,007 6,082 6,621 5,433 Basic net income per share................ 0.24 0.29 0.31 0.26 Net income per share--assuming dilution... 0.24 0.29 0.31 0.25 Year ended December 31, 1998 Product sales............................. $118,269 $165,242 $172,784 $160,007 Gross profit.............................. 50,669 66,201 69,345 71,648 Operating income.......................... 10,602 13,745 15,435 17,119 Net income................................ 5,819 7,672 8,361 8,920 Basic net income per share................ 0.28 0.36 0.39 0.42 Net income per share--assuming dilution... 0.27 0.36 0.39 0.41
F-20 O'REILLY AUTOMOTIVE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these interim periods presented have been included. NOTE 16--SUBSEQUENT EVENTS Effective January 4, 1999, the Company entered into a Master Lease Agreement with O'Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company) related to the sale and leaseback of certain properties. The transaction closed on January 4, 1999 with a purchase price of approximately $5.5 million. The lease calls for an initial term of 15 years with two five- year renewal options. In January 1999, the Company amended its syndicated credit facility. Under the terms of the amendment, the commitment under the revolving credit facility was increased to $160,000,000 from $125,000,000. This $35,000,000 increase terminates July 31, 1999 or upon the occurrence of a "capital markets event" (as defined). The Company believes that the completion of the offering discussed below will constitute a capital markets event. Advances under this amendment bear interest at the rates provided for in the original credit agreement. On March 5, 1999, the Company filed a registration statement with the Securities and Exchange Commission for a secondary offering of 4,140,000 shares of common stock, 3,000,000 of which are to be offered by the Company. The net proceeds from this offering will be used to repay certain of the outstanding indebtedness of the Company under its credit facility. F-21 [Inside Back Cover] [Picture of inside of O'Reilly store showing rows of automotive products.] Our stores offer an average of 23,000 SKUs. [Picture of outside of O'Reilly store including O'Reilly sign.] Our stores typically are free-standing locations averaging 6,500 square feet in size. [Picture of team member using bar scanner to price merchandise that a customer is buying.] Our technically proficient Professional Parts People provide enhanced customer service. [Picture of outside of distribution center and O'Reilly distribution trucks.] We serve our stores from four strategically located distribution centers. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- , 1999 [Logo] 4,140,000 Shares of Common Stock --------------------- PROSPECTUS --------------------- Donaldson, Lufkin & Jenrette George K. Baum & Company William Blair & Company - ------------------------------------------------------------------------------- We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to make representations as to matters not stated in this prospectus. You must not rely on unauthorized information. This prospectus is not an offer to sell these securities or our solicitation of your offer to buy the securities in any jurisdiction where that would not be permitted or legal. Neither the delivery of this prospectus nor any sales made hereunder after the date of this prospectus shall create an implication that the information contained herein or the affairs of the Company have not changed since the date hereof. - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The following table sets forth the estimated expenses expected to be incurred in connection with the issuance and distribution of the shares being registered, other than the underwriting discounts and commissions. Securities and Exchange Commission filing fee................... $ 57,120 NASD review fee................................................. 21,360 Nasdaq listing fee.............................................. 17,500 Printing and engraving expenses................................. 50,000 Legal fees and expenses......................................... 150,000 Accounting fees and expenses.................................... 100,000 Transfer Agent Fees............................................. 5,000 Miscellaneous................................................... 24,020 -------- Total....................................................... $425,000 ========
Item 15. Indemnification of Directors and Officers Sections 351.355(1) and (2) of The General and Business Corporation Law of the State of Missouri provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, except that, in the case of an action or suit by or in the right of the corporation, the corporation may not indemnify such persons against judgments and fines and no person shall be indemnified as to any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation, unless and only to the extent that the court in which the action or suit was brought determines upon application that such person is fairly and reasonably entitled to indemnity for proper expenses. Section 351.355(3) provides that, to the extent that a director, officer, employee or agent of the corporation has been successful in the defense of any such action, suit or proceeding or any claim, issue or matter therein, he shall be indemnified against expenses, including attorney's fees, actually and reasonably incurred in connection with such action, suit or proceeding. Section 351.355(7) provides that a corporation may provide additional indemnification to any person indemnifiable under subsection (1) or (2), provided such additional indemnification is authorized by the corporation's articles of incorporation or an amendment thereto or by a shareholder-approved bylaw or agreement, and provided further that no person shall thereby be indemnified against conduct which was finally adjudged to have been knowingly fraudulent, deliberately dishonest or willful misconduct or which involve an accounting for profits pursuant to Section 16(b) of the Securities Exchange Act of 1934. Article IX of the Restated Articles of Incorporation permits the registrant to enter into agreements with its directors, officers, employees and agents providing such indemnification as deemed appropriate, up to the maximum extent II-1 permitted by law. Article IX of the Restated Articles of Incorporation of the registrant provides that the registrant shall extend to its directors and executive officers the indemnification specified in subsections (1) and (2) and the additional indemnification authorized in subsection (7) and that it may extend to other officers, employees and agents such indemnification and additional indemnification. Pursuant to Section 8(b) of the Underwriting Agreement directors and executive officers of the registrant also may be entitled to indemnification from the Underwriters under certain circumstances. Item 16. Exhibits and Financial Statement Schedules Exhibits:
Exhibit Number Description 1.1 Form of Underwriting Agreement 3.1 Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 of our Registration Statement on Form S- 1, File No. 33-58948) 4.1 Form of Stock Certificate for Common Stock (incorporated by reference to Exhibit 4.1 of our Registration Statement on Form S- 1, File No. 33-58948) 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois) 5.2 Opinion of Gallop, Johnson & Neuman, L.C. (with respect to certain matters of Missouri law) 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Arthur Andersen, LLP, Independent Auditors 23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included in Exhibit 5.1) 23.4 Consent of Gallop, Johnson & Neuman, L.C. (included in Exhibit 5.2) 24.1 Power of Attorney (included on the signature page hereto)* 27.1 Financial Data Schedule*
- --------------------- *Previously filed Item 17. Undertakings 1. The undersigned registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 2. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual II-2 report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Springfield and State of Missouri on this 10th day of March, 1999. O'Reilly Automotive, Inc. /s/ David E. O'Reilly By: _________________________________ David E. O'Reilly President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities indicated on this 10th day of March, 1999.
Signature Title * Chairman Emeritus and ____________________________________ Director Charles H. O'Reilly, Sr. * Chairman of the Board and ____________________________________ Director Charles H. O'Reilly, Jr. /s/ David E. O'Reilly President, Chief Executive ____________________________________ Officer and Director David E. O'Reilly (Principal Executive Officer) * President, Chief Executive ____________________________________ Operating Officer and Lawrence P. O'Reilly Director * Executive Vice-President and ____________________________________ Director Rosalie O'Reilly Wooten * Vice-President of Finance, ____________________________________ Chief Financial Officer and James R. Batten Treasurer (Principal Financial and Accounting Officer) * Director ____________________________________ Jay Burchfield * Director ____________________________________ Joe C. Greene
/s/ David E. O'Reilly By: ______________________ David E. O'Reilly Attorney-in-Fact II-4 EXHIBIT INDEX
Exhibit No. Description of Exhibit 1.1 Form of Underwriting Agreement 3.1 Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 4.1 of our Registration Statement on Form S-1, File No. 33-58948) 4.1 Form of Stock Certificate for Common Stock (incorporated by reference to Exhibit 3.1 of our Registration Statement on Form S-1, File No. 33-58948) 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois) 5.2 Opinion of Gallop, Johnson & Neuman, L.C. (with respect to certain matters of Missouri law) 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Arthur Andersen, LLP, Independent Auditors 23.3 Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included in Exhibit 5.1) 23.4 Consent of Gallop, Johnson & Neuman, L.C. (included in Exhibit 5.2) 24.1 Power of Attorney (included on the signature page hereto)* 27.1 Financial Data Schedule*
- --------------------- *Previously filed EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 4,140,000 Shares O'REILLY AUTOMOTIVE, INC. Common Stock UNDERWRITING AGREEMENT ---------------------- __________ __, 1999 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GEORGE K. BAUM & COMPANY WILLIAM BLAIR & COMPANY As representatives of the several Underwriters named in Schedule I hereto c/o Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10172 Dear Sirs: O'Reilly Automotive, Inc., a Missouri corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters"), and certain shareholders of the Company named in Schedule II hereto (the "Selling Shareholders") severally propose to sell to the several Underwriters, an aggregate of 4,140,000 shares of the common stock, par value $.01 per share of the Company (the "Firm Shares"), of which 3,000,000 shares are to be issued and sold by the Company and 1,140,000 shares are to be sold by the Selling Shareholders, each Selling Shareholder selling the amount set forth opposite such Selling Shareholder's name in Schedule II hereto. The Company also proposes to issue and sell to the several Underwriters not more than an additional 621,000 shares of its common stock, par value $.01 per share (the "Additional Shares"), if requested by the Underwriters as provided in 1 Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter referred to collectively as the "Shares". The shares of common stock of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the "Common Stock". The Company and the Selling Shareholders are hereinafter sometimes referred to collectively as the "Sellers." Section 1. Registration Statement and Prospectus. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-3 (File No. 333- 73377), including a prospectus, relating to the Shares. The registration statement, as amended at the time it became effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as the "Registration Statement"; and the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus" (including, in the case of all references to the Registration Statement or the Prospectus, documents incorporated therein by reference). If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. The terms "supplement" and "amendment" or "amend" as used in this Agreement with respect to the Registration Statement or the Prospectus shall include all documents subsequently filed by the Company with the Commission pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Exchange Act") that are deemed to be incorporated by reference in the Prospectus. Section 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, (i) the Company agrees to issue and sell 3,000,000 Firm Shares, (ii) each Selling Shareholder agrees, severally and not jointly, to sell the number of Firm Shares set forth opposite such Selling Shareholder's name in Schedule II hereto and (iii) each Underwriter agrees, 2 severally and not jointly, to purchase from each Seller at a price per Share of $______ (the "Purchase Price") the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company agrees to issue and sell the Additional Shares and the Underwriters shall have the right to purchase, severally and not jointly, up to 621,000 Additional Shares from the Company at the Purchase Price. Additional Shares may be purchased solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. The Underwriters may exercise their right to purchase Additional Shares in whole or in part from time to time by giving written notice thereof to the Company within 30 days after the date of this Agreement. You shall give any such notice on behalf of the Underwriters and such notice shall specify the aggregate number of Additional Shares to be purchased pursuant to such exercise and the date for payment and delivery thereof, which date shall be a business day (i) no earlier than two business days after such notice has been given (and, in any event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no later than ten business days after such notice has been given. If any Additional Shares are to be purchased, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) which bears the same proportion to the total number of Additional Shares to be purchased from the Company as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I bears to the total number of Firm Shares. Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or other arrangement that transfers all or a portion of the economic consequences associated with the ownership of any Common Stock (regardless of whether any of the transactions described in clause (i) or (ii) is to be settled by the delivery of Common Stock, or such other securities, in cash or otherwise), except to the 3 Underwriters pursuant to this Agreement, for a period of 90 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding the foregoing, during such period (A) (i) the Company may grant stock options or other stock awards or issue Common Stock pursuant to the Company's existing stock option and other stock incentive plans and (ii) the Company may issue shares of Common Stock upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and (B) each Selling Shareholder may engage in any of such transactions pursuant to (i) a bona fide gift, (ii) transfers made to family members, trusts or other similar transfers, (iii) transfers to affiliated entities and (iv) pledges in connection with loans, provided, that any person receiving or holding Firm Shares as a result of (i), (ii), (iii) or (iv) of this clause (B) agrees in writing with Donaldson, Lufkin & Jenrette Securities Corporation to be bound by the provisions of such agreement. The Company also agrees not to file any registration statement, other than a registration statement on Form S-8, with respect to any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock for a period of 90 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In addition, each Selling Shareholder agrees that, for a period of 90 days after the date of the Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, it will not make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. The Company shall, prior to or concurrently with the execution of this Agreement, deliver an agreement executed by (i) each of the directors and executive officers of the Company who is not a Selling Shareholder and (ii) each shareholder listed on Annex I hereto to the effect that such person will not, during the period commencing on the date such person signs such agreement and ending 90 days after the date of the Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation, (A) engage in any of the transactions described in the first sentence of this paragraph or (B) make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock. Section 3. Terms of Public Offering. The Sellers are advised by you that the Underwriters propose (i) to make a public offering of their respective portions of the Shares as soon after the execution and delivery of this Agreement as in 4 your judgment is advisable and (ii) initially to offer the Shares upon the terms set forth in the Prospectus. Section 4. Delivery and Payment. The Shares shall be represented by definitive certificates and shall be issued in such authorized denominations and registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation shall request no later than two business days prior to the Closing Date or the applicable Option Closing Date (as defined below), as the case may be. The Shares shall be delivered by or on behalf of the Sellers, with any transfer taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin & Jenrette Securities Corporation through the facilities of The Depository Trust Company ("DTC"), for the respective accounts of the several Underwriters, against payment to the Sellers of the Purchase Price therefore by wire transfer of Federal or other funds immediately available in New York City. The certificates representing the Shares shall be made available for inspection not later than 9:30 A.M., New York City time, on the business day prior to the Closing Date or the applicable Option Closing Date, as the case may be, at the office of DTC or its designated custodian (the "Designated Office"). The time and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New York City time, on __________ __, 1999 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing. The time and date of delivery and payment for the Firm Shares are hereinafter referred to as the "Closing Date". The time and date of delivery and payment for any Additional Shares to be purchased by the Underwriters shall be 9:00 A.M., New York City time, on the date specified in the applicable exercise notice given by you pursuant to Section 2 or such other time on the same or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company shall agree in writing. The time and date of delivery and payment for any Additional Shares are hereinafter referred to as the "Option Closing Date". The documents to be delivered on the Closing Date or any Option Closing Date on behalf of the parties hereto pursuant to Section 10 of this Agreement shall be delivered at the offices of Skadden, Arps, Slate, Meagher & Flom (Illinois), 333 W. Wacker Drive, Suite 2100, Chicago, Illinois, and the Shares shall be delivered at the Designated Office, all on the Closing Date or such Option Closing Date, as the case may be. 5 Section 5. Agreements of the Company. The Company agrees with you: (a) To advise you promptly and, if requested by you, to confirm such advice in writing, (i) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information, (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction, or the initiation of any proceeding for such purposes, (iii) when any amendment to the Registration Statement becomes effective, (iv) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, when the Rule 462(b) Registration Statement has become effective and (v) of the happening of any event during the period referred to in Section 5(d) below which makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or which requires any additions to or changes in the Registration Statement or the Prospectus in order to make the statements therein not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. (b) To furnish you three signed copies of the Registration Statement as first filed with the Commission and of each amendment to it, including all exhibits and documents incorporated therein by reference, and to furnish to you and each Underwriter designated by you such number of conformed copies of the Registration Statement as so filed and of each amendment to it, without exhibits but including documents incorporated therein by reference, as you may reasonably request. (c) To prepare the Prospectus, the form and substance of which shall be reasonably satisfactory to you, and to file the Prospectus in such form with the Commission within the applicable period specified in Rule 424(b) under the Act; during the period specified in Section 5(d) below, not to file any further amendment to the Registration Statement and not to make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall reasonably object after being so advised; and, during such period, to prepare and file with the Commission, promptly upon your reasonable request, any amendment to the Registration Statement or amendment or 6 supplement to the Prospectus which may be necessary or advisable in connection with the distribution of the Shares by you, and to use its best efforts to cause any such amendment to the Registration Statement to become promptly effective. (d) The Company will use its best efforts to furnish, prior to 10:00 A.M., New York City time, on the first business day after the date of this Agreement and from time to time thereafter for such period as in the opinion of counsel for the Underwriters a prospectus is required by law to be delivered in connection with sales by an Underwriter or a dealer, in New York City to each Underwriter and any dealer as many copies of the Prospectus (and of any amendment or supplement to the Prospectus) and any documents incorporated therein by reference as such Underwriter or dealer may reasonably request. (e) If during the period specified in Section 5(d), any event shall occur or condition shall exist as a result of which, in the opinion of counsel for the Underwriters and the Company, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters and the Company, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare and file with the Commission an appropriate amendment or supplement to the Prospectus so that the statements in the Prospectus, as so amended or supplemented, will not in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with applicable law, and to furnish to each Underwriter and to such dealers as you shall specify, such number of copies thereof as such Underwriter or dealer may reasonably request. (f) Prior to any public offering of the Shares, to cooperate with you and counsel for the Underwriters in connection with the registration or qualification of the Shares for offer and sale by the several Underwriters and by dealers under the state securities or Blue Sky laws of such jurisdictions as you may request, to continue such registration or qualification in effect so long as required for distribution of the Shares and to file such consents to service of process or other documents as may be necessary in order to effect such registration or qualification; provided, however, that the Company shall not be required in connection therewith to qualify as a foreign corporation in any jurisdiction in which it is not now so qualified or to take any action that would subject it to 7 general service of process or taxation other than as to matters and transactions relating to the Prospectus, the Registration Statement, any preliminary prospectus or the offering or sale of the Shares, in any jurisdiction in which it is not now so subject. (g) To mail and make generally available to its shareholders as soon as reasonably practicable an earnings statement covering the twelve-month period ending March 31, 2000 that shall satisfy the provisions of Section 11(a) of the Act, and to advise you in writing when such statement has been so made available. (h) During the period of three years after the date of this Agreement, to furnish to you as soon as available copies of all reports or other communications furnished to the record holders of Common Stock or furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company is listed and such other publicly available information concerning the Company and its subsidiaries as you may reasonably request. (i) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of the Sellers' obligations under this Agreement, including: (i) the fees, disbursements and expenses of the Company's counsel, the Company's accountants and any Selling Shareholder's counsel (in addition to the Company's counsel) in connection with the registration and delivery of the Shares under the Act and all other fees and expenses in connection with the preparation, printing, filing and distribution of the Registration Statement (including financial statements and exhibits), any preliminary prospectus, the Prospectus and all amendments and supplements to any of the foregoing, including the mailing and delivering of copies thereof to the Underwriters and dealers in the quantities specified herein, (ii) all costs and expenses related to the transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) all costs of printing or producing this Agreement and any other agreements or documents in connection with the offering, purchase, sale or delivery of the Shares, (iv) the filing fees for the Underwriters in connection with the review and clearance of the offering of the Shares by the National Association of Securities Dealers, Inc., (v) all costs and expenses incident to the listing of the Shares on the Nasdaq National Market, (vi) the cost of printing certificates representing the Shares, (vii) the costs and 8 charges of any transfer agent, registrar and/or depositary, and (viii) all other costs and expenses incident to the performance of the obligations of the Company and the Selling Shareholders hereunder for which provision is not otherwise made in this Section. The provisions of this Section shall not supersede or otherwise affect any agreement that the Company and the Selling Shareholders may otherwise have for allocation of such expenses among themselves. (j) To use its best efforts to list for quotation the Shares on the Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq National Market for a period of three years after the date of this Agreement. (k) To use its best efforts to do and perform all things required or necessary to be done and performed under this Agreement by the Company prior to the Closing Date or any Option Closing Date, as the case may be, and to satisfy all conditions precedent to the delivery of the Shares. (l) To use the proceeds from the sale of the Shares in the manner described in the Prospectus under the caption "Use of Proceeds". (m) If the Registration Statement at the time of the effectiveness of this Agreement does not cover all of the Shares, to file a Rule 462(b) Registration Statement with the Commission registering the Shares not so covered in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of this Agreement and to pay to the Commission the filing fee for such Rule 462(b) Registration Statement at the time of the filing thereof or to give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. Section 6. Representations and Warranties of the Company. The Company represents and warrants to each Underwriter that: (a) The Company meets the requirements for the use of Form S-3 under the Act; the Registration Statement has become effective (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement); any Rule 462(b) Registration Statement filed after the effectiveness of this Agreement will become effective no later than 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. 9 (b) (i) Each document, if any, filed or to be filed pursuant to the Exchange Act and incorporated by reference in the Prospectus complied or will comply when so filed in all material respects with the Exchange Act; (ii) the Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement), when it became effective, did not contain and, as amended, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (iii) the Registration Statement (other than any Rule 462(b) Registration Statement to be filed by the Company after the effectiveness of this Agreement) and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Act, (iv) if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement and any amendments thereto, when they become effective (A) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (B) will comply in all material respects with the Act and (v) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. The Company and the Selling Shareholders hereby acknowledge for all purposes under this Agreement (including this paragraph (b) and Section 9 hereof) that the statements set forth under the caption "Underwriting" in the Prospectus constitute the only written information furnished to the Company by or on behalf of the Underwriters for use in the Registration Statement or the Prospectus or any preliminary prospectus (or any amendment or supplement to them). (c) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the Act, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, 10 not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in any preliminary prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (d) The Company and each of its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties, and each is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole ("Material Adverse Effect"). (e) There are no outstanding subscriptions, rights, warrants, options, calls, convertible securities, commitments of sale or liens granted or issued by the Company or any of its subsidiaries relating to or entitling any person to purchase or otherwise to acquire any shares of the capital stock of the Company or any of its subsidiaries, except as otherwise disclosed in the Registration Statement. (f) All the outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Shareholders) have been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; and the Shares to be issued and sold by the Company have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (g) All of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature. 11 (h) The authorized capital stock of the Company conforms in all material respects as to legal matters to the description thereof contained in the Prospectus. (i) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws or in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound. (j) The execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the Act or the securities or Blue Sky laws of the various states all of which shall have been obtained by Closing), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the conduct of the business of the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property or (iv) result in the suspension, termination or revocation of any Material Authorization (as defined below) of the Company or any of its subsidiaries or any other impairment of the rights of the holder of any such Material Authorization. (k) There are no legal or governmental proceedings pending or, to the Company's knowledge, threatened, to which the Company or any of its subsidiaries is a party or to which any of their respective property is subject that are required to be described in the Registration Statement or the Prospectus and are not so described; nor are there any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the 12 Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required. (l) Neither the Company nor any of its subsidiaries has violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the Employee Retirement Income Security Act of 1974, as amended, or any provisions of the Foreign Corrupt Practices Act or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a Material Adverse Effect. (m) Each of the Company and its subsidiaries has such permits, licenses, consents, exemptions, franchises, authorizations and other approvals of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such permits, licenses, consents, exemptions, franchises, authorizations and other approvals, or to make any such filing or notice would not, singly or in the aggregate, have a Material Adverse Effect (each, a "Material Authorization"). Each such Material Authorization is valid and in full force and effect and each of the Company and its subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Material Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Material Authorization; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a Material Adverse Effect. 13 (n) There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any Authorization, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a Material Adverse Effect. (o) Except as otherwise set forth in the Prospectus or such as are not material to the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, the Company and its subsidiaries have good and marketable title, free and clear of all material liens, claims, encumbrances and restrictions except liens for taxes not yet due and payable, to all property and assets described in the Registration Statement as being owned by it. All leases to which the Company or any of its subsidiaries are parties are valid and binding, and no default has occurred or is continuing thereunder which would reasonably be expected to result in any Material Adverse Effect, and the Company and its subsidiaries enjoy peaceful and undisturbed possession under all such leases to which any of them is a party as lessee with such exceptions as do not materially interfere with the use made by the Company or such subsidiary. (p) This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms. (q) The Company and each of its subsidiaries maintains reasonably adequate insurance. (r) Ernst & Young LLP are independent public accountants with respect to the Company and its subsidiaries as required by the Act. (s) The consolidated financial statements included in the Registration Statement and the Prospectus (and any amendment or supplement thereto), together with related schedules and notes, present fairly the consolidated financial position, results of operations and changes in financial position of the Company and its subsidiaries on the basis stated therein at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting 14 principles consistently applied throughout the periods involved, except as disclosed therein; the supporting schedules, if any, included in the Registration Statement present fairly in accordance with generally accepted accounting principles the information required to be stated therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are, in all material respects, accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company. (t) The Company and its subsidiaries own or possess all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names ("intellectual property") currently employed by them in connection with the business now operated by them, except where the failure to own or possess or otherwise be able to acquire such intellectual property would not, singly or in the aggregate, have a material adverse effect; and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of such intellectual property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. (u) All material tax returns required to be filed by the Company and its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been provided. (v) Neither the Company nor any of its subsidiaries is involved in any labor dispute which, either individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect, nor, to the knowledge of the Company, is any such dispute threatened. (w) The Company's outstanding Common Stock is registered pursuant to Section 12(g) of the Exchange Act and is listed on the Nasdaq National Market. 15 (x) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (y) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement. (z) Except as otherwise set forth in the Prospectus, neither the Company nor any of its subsidiaries is party to any transaction or agreement with an Affiliate including, without limitation, any transaction or agreement with respect to the purchase, sale, exchange or lease of property or the rendering of any service to or by an Affiliate, except for transactions or agreements entered into with Affiliates in the ordinary course of business on terms which are no less favorable to the Company or the relevant subsidiary than those which would have been obtained in a comparable transaction with an unaffiliated third party; provided that for purposes of this paragraph (z), the Company and its subsidiaries shall not be considered to be Affiliates of each other. (aa) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there has not occurred any material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there has not been any material adverse change or any development involving a prospective material adverse change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries has incurred any material liability or obligation, direct or contingent. (bb) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to the Underwriters as to the matters covered thereby. 16 Section 7. Representations and Warranties of the Selling Shareholders. Each Selling Shareholder severally and not jointly represents and warrants to each Underwriter that: (a) Such Selling Shareholder is the lawful owner of the Shares to be sold by such Selling Shareholder pursuant to this Agreement and has, and on the Closing Date will have, good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever. (b) Such Selling Shareholder has, and on the Closing Date will have, full legal right, power and authority, and all authorization and approval required by law, to enter into this Agreement, the Custody Agreement signed by such Selling Shareholder and United Missouri Bank N.A., as Custodian, relating to the deposit of the Shares to be sold by such Selling Shareholder (the "Custody Agreement") and the Power of Attorney of such Selling Shareholder appointing certain individuals as such Selling Shareholder's attorneys-in-fact (the "Attorneys-in- Fact") to the extent set forth therein, relating to the transactions contemplated hereby and by the Registration Statement and the Custody Agreement (the "Power of Attorney") and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder in the manner provided herein and therein. (c) This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder. (d) The Custody Agreement of such Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, enforceable as to such Selling Shareholder in accordance with its terms. (e) The Power of Attorney of such Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding instrument of such Selling Shareholder, enforceable as to such Selling Shareholder in accordance with its terms, and, pursuant to such Power of Attorney, such Selling Shareholder has, among other things, authorized the Attorneys, or any one of them, to execute and deliver on such Selling Shareholder's behalf this Agreement and any other documents that they, or any 17 one of them, may deem necessary or desirable in connection with the transactions contemplated hereby and thereby and to deliver the Shares to be sold by such Selling Shareholder pursuant to this Agreement. (f) Upon delivery of and payment for the Shares to be sold by such Selling Shareholder pursuant to this Agreement, good and clear title to such Shares will pass to the Underwriters, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever. (g) Such Selling Shareholder has not taken, and will not take, directly or indirectly, any action designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares pursuant to the distribution contemplated by this Agreement, and other than as permitted by the Act, the Selling Shareholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. (h) The execution, delivery and performance of this Agreement, the Custody Agreement and Power of Attorney of such Selling Shareholder by or on behalf of such Selling Shareholder, the compliance by such Selling Shareholder with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (i) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the Act or the securities or Blue Sky laws of the various states), (ii) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the organizational documents of such Selling Shareholder, if such Selling Shareholder is not an individual, or any material indenture, loan agreement, mortgage, lease or other agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder or any property of such Selling Shareholder is bound or (iii) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over such Selling Shareholder or any property of such Selling Shareholder. (i) Certificates in negotiable form for the Shares to be sold by such Selling Shareholder have been placed in custody under the Custody Agreement with the Custodian for delivery under this Agreement. Such Selling Shareholder 18 specifically agrees that the Shares represented by the certificates so held in custody for such Selling Shareholder are subject to the interests of the several Underwriters and the Company, that the arrangements made by such Selling Shareholder for such custody, including the Power of Attorney referenced in such Custody Agreement, are to that extent irrevocable, and that the obligations of such Selling Shareholder shall not be terminated by any act of such Selling Shareholder or by operation of law, whether by the death or incapacity of such Selling Shareholder (or, in the case of a Selling Shareholder that is not an individual, the dissolution or liquidation of such Selling Shareholder) or the occurrence of any other event; if any such death, incapacity, dissolution, liquidation or other such event should occur before the delivery of such Shares hereunder, certificates for such Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity, dissolution, liquidation or other event had not occurred, regardless of whether the Custodian shall have received notice of such death, incapacity, dissolution, liquidation or other event. (j) The information in the Registration Statement under the caption "Selling Shareholders" which specifically relates to such Selling Shareholder does not, and will not on the Closing Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (k) At any time during the period described in Section 5(d), if there is any change in the information referred to in Section 7(l), such Selling Shareholder will immediately notify you of such change. (l) Each certificate signed by or on behalf of such Selling Shareholder and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by such Selling Shareholder to the Underwriters as to the matters covered thereby. Section 8. Additional Representations of Certain Selling Shareholders. To the best knowledge of Charles H. O'Reilly, Jr., Lawrence P. O'Reilly, David E. O'Reilly, Rosalie O'Reilly Wooten, Charles H. O'Reilly, Sr., Ted F. Wise, James R. Batten, Jay Burchfield, and Joe C. Greene, each of the Registration Statement and Prospectus does not contain an untrue statement of a material fact 19 or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and the preliminary prospectus does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Section 9. Indemnification. (a) The Company agrees, and each of the Selling Shareholders, severally, and not jointly, in proportion to the number of Shares to be sold by such Selling Shareholder hereunder, agrees to indemnify and hold harmless each Underwriter, its directors, its officers and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages, liabilities and judgments (including, without limitation, any legal or other expenses reasonably incurred in connection with investigating or defending any matter, including any action, that would reasonably be expected to give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished in writing to the Company by such Underwriter through you expressly for use therein provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter or any person controlling such Underwriter who failed to deliver a Prospectus, as then amended or supplemented (so long as the Prospectus and any amendment or supplement thereto was provided by the Company to the several Underwriters in the requisite quantity and on a timely basis to permit proper delivery on or prior to the Closing Date) to the person asserting any losses, claims, damages, liabilities or judgments caused by any untrue statement or alleged untrue statement of a material fact contained in such preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in the Prospectus, as so amended or supplemented, and such Prospectus was required by 20 law to be delivered at or prior to the written confirmation of sale to such person; provided, further, that the foregoing indemnity agreement of each Selling Shareholder pursuant to this Section 9(a) shall apply solely with respect to statements or omissions made under the caption "Selling Shareholders" in the Prospectus in reliance upon and in conformity with information furnished in writing to the Company expressly for use in the Registration Statement, the Prospectus, any preliminary prospectus or any amendments thereto, by or on behalf of such Selling Shareholder. Notwithstanding the foregoing, the aggregate liability of any Selling Shareholder pursuant to this Section 9(a) and Section 9(d) below shall be limited to an amount equal to the total proceeds (after deducting underwriting discounts and commissions and expenses) received by such Selling Shareholder from the Underwriters for the sale of the Shares sold by such Selling Shareholder hereunder. (b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling Shareholder and each person, if any, who controls such Selling Shareholder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Sellers to such Underwriter but only with reference to information relating to such Underwriter furnished in writing to the Company by such Underwriter through you expressly for use in the Registration Statement (or any amendment thereto), the Prospectus (or any amendment or supplement thereto) or any preliminary prospectus. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 9(a) or 9(b) (the "indemnified party"), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 9(a) and 9(b), the Underwriter shall not be required to assume the defense of such action pursuant to this Section 9(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense 21 of such Underwriter). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for (i) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Underwriters, their officers and directors and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and all persons, if any, who control the Company within the meaning of either such Section and (iii) the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all Selling Shareholders and all persons, if any, who control any Selling Shareholder within the meaning of either such Section, and all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters, their officers and directors and such control persons of any Underwriters, such firm shall be designated in writing by Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such separate firm for the Company and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for the Selling Shareholders and such control persons of any Selling Shareholders, such firm shall be designated in writing by the Attorneys. The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with the indemnified party's written consent or (ii) effected without the indemnified 22 party's written consent if the settlement is entered into more than twenty business days after the indemnifying party shall have received a written request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent the indemnification provided for in this Section 9 is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Sellers on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 9(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 9(d)(i) above but also the relative fault of the Sellers on the one hand and the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (after deducting underwriting discounts and commissions, but before deducting expenses) received by the Sellers, and the total underwriting discounts and commissions received by the Underwriters, bear to the total price to the public of the Shares, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, 23 whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders on the one hand or the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Sellers and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9(d) are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. The Selling Shareholders' obligations to contribute pursuant to this Section 9(d) are several in proportion to the respective number of shares sold by the Selling Shareholders and not joint. (e) The remedies provided for in this Section 9 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (f) Each Selling Shareholder hereby designates David E. O'Reilly, c/o O'Reilly Automotive, Inc., 233 South Patterson, Springfield, Missouri 65802, as its authorized agent, upon which process may be served in any action which may be instituted in any state or federal court in the State of New York by any 24 Underwriter, any director or officer of any Underwriter or any person controlling any Underwriter asserting a claim for indemnification or contribution under or pursuant to this Section 9, and each Selling Shareholder will accept the jurisdiction of such court in such action, and waives, to the fullest extent permitted by applicable law, any defense based upon lack of personal jurisdiction or venue. A copy of any such process shall be sent or given to such Selling Shareholder, at the address for notices specified in Section 13 hereof. Section 10. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase the Firm Shares under this Agreement are subject to the satisfaction of each of the following conditions: (a) All the representations and warranties of the Company contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date. (b) If the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission. (c) You shall have received on the Closing Date a certificate dated the Closing Date, signed by David E. O'Reilly and James R. Batten, in their capacities as the Chief Executive Officer and Chief Financial Officer of the Company, confirming the matters set forth in Sections 6(aa), 10(a) and 10(b) and that the Company has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by the Company on or prior to the Closing Date. (d) Since the respective dates as of which information is given in the Prospectus other than as set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (i) there shall not have occurred any change or any development involving a prospective change in the condition, financial or otherwise, or the earnings, business, management or operations of the Company and its subsidiaries, taken as a whole, (ii) there shall 25 not have been any change or any development involving a prospective change in the capital stock or in the long-term debt of the Company or any of its subsidiaries and (iii) neither the Company nor any of its subsidiaries shall have incurred any liability or obligation, direct or contingent, the effect of which, in any such case described in clause 10(d)(i), 10(d)(ii) or 10(d)(iii), in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (e) All the representations and warranties of each Selling Shareholder contained in this Agreement shall be true and correct on the Closing Date with the same force and effect as if made on and as of the Closing Date and you shall have received on the Closing Date a certificate dated the Closing Date from each Attorney-in-Fact to such effect and to the effect that each Selling Shareholder has complied with all of the agreements and satisfied all of the conditions herein contained and required to be complied with or satisfied by it on or prior to the Closing Date. (f) You shall have received on the Closing Date an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, of Skadden, Arps, Slate, Meagher & Flom, counsel for the Company and the Selling Shareholders, to the effect that: (i) each of the Company and its subsidiaries has been duly incorporated, is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation and has the corporate power and authority to carry on its business as described in the Prospectus and to own, lease and operate its properties; (ii) each of the Company and its subsidiaries is duly qualified and is in good standing as a foreign corporation authorized to do business in each jurisdiction in which the nature of its business or its ownership or leasing of property requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; (iii) all the outstanding shares of capital stock of the Company (including the Shares to be sold by the Selling Shareholders) have 26 been duly authorized and validly issued and are fully paid, non-assessable and not subject to any preemptive or similar rights; (iv) the Shares to be issued and sold by the Company hereunder have been duly authorized and, when issued and delivered to the Underwriters against payment therefor as provided by this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights; (v) all of the outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable, and are owned by the Company, directly or indirectly through one or more subsidiaries, free and clear of any security interest, claim, lien, encumbrance or adverse interest of any nature; (vi) this Agreement has been duly authorized, executed and delivered by the Company and by or on behalf of each Selling Shareholder (except as rights to indemnity and contribution hereunder may be limited by applicable law and except as the enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and subject to general principles of equity, whether enforcement is considered in a proceeding at law or in equity); (vii) the authorized capital stock of the Company conforms as to legal matters to the description thereof incorporated by reference in the Prospectus; (viii) the Registration Statement has become effective under the Act, no stop order suspending its effectiveness has been issued and no proceedings for that purpose are, to the best of such counsel's knowledge after due inquiry, pending before or contemplated by the Commission; (ix) the statements under the captions "Risk Factors - Shares Eligible for Future Sale," "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital 27 Resources," "Business - Properties," "Business - Servicemarks and Trademarks," "Selling Shareholders," and "Description of Capital Stock" in the Prospectus and Item 15 of Part II of the Registration Statement, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings; (x) neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws and, to the best of such counsel's knowledge after due inquiry, neither the Company nor any of its subsidiaries is in default in the performance of any obligation, agreement, covenant or condition contained in any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound; (xi) the execution, delivery and performance of this Agreement by the Company, the compliance by the Company with all the provisions hereof and the consummation of the transactions contemplated hereby will not (A) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (B) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter or by-laws of the Company or any of its subsidiaries or any indenture, loan agreement, mortgage, lease or other agreement or instrument that is material to the Company and its subsidiaries, taken as a whole, to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or their respective property is bound, (C) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over the Company, any of its subsidiaries or their respective property or (D) result in the suspension, termination or revocation of any 28 Authorization of the Company or any of its subsidiaries or any other impairment of the rights of the holder of any such Authorization; (xii) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is or could be a party or to which any of their respective property is or could be subject that are required to be described in the Registration Statement or the Prospectus and are not so described, or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required; (xiii) neither the Company nor any of its subsidiaries has violated any Environmental Law, any provisions of the Employee Retirement Income Security Act of 1974, as amended, or any provisions of the Foreign Corrupt Practices Act or the rules and regulations promulgated thereunder, except for such violations which, singly or in the aggregate, would not have a material adverse effect on the business, prospects, financial condition or results of operation of the Company and its subsidiaries, taken as a whole; (xiv) each of the Company and its subsidiaries has such Authorizations of, and has made all filings with and notices to, all governmental or regulatory authorities and self-regulatory organizations and all courts and other tribunals, including, without limitation, under any applicable Environmental Laws, as are necessary to own, lease, license and operate its respective properties and to conduct its business, except where the failure to have any such Authorization or to make any such filing or notice would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; each such Authorization is valid and in full force and effect and each of the Company and its subsidiaries is in compliance with all the terms and conditions thereof and with the rules and regulations of the authorities and governing bodies having jurisdiction with respect thereto; and no event has occurred (including, without limitation, the receipt of any notice from 29 any authority or governing body) which allows or, after notice or lapse of time or both, would allow, revocation, suspension or termination of any such Authorization or results or, after notice or lapse of time or both, would result in any other impairment of the rights of the holder of any such Authorization; and such Authorizations contain no restrictions that are burdensome to the Company or any of its subsidiaries; except where such failure to be valid and in full force and effect or to be in compliance, the occurrence of any such event or the presence of any such restriction would not, singly or in the aggregate, have a material adverse effect on the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; (xv) the Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (xvi) to the best of such counsel's knowledge after due inquiry, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement; (xvii) (A) each document, if any, filed pursuant to the Exchange Act and incorporated by reference in the Prospectus (except for financial statements and other financial data included or incorporated by reference therein as to which no opinion need be expressed) complied when so filed as to form with the Exchange Act, (B) the Registration Statement and the Prospectus and any supplement or amendment thereto (except for the financial statements and other financial data included therein as to which no opinion need be expressed) comply as to form with the Act, (C) such counsel has no reason to believe that at the time the Registration Statement became effective or on the date of this Agreement, the Registration Statement 30 and the prospectus included therein (except for the financial statements and other financial data as to which such counsel need not express any belief) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (D) such counsel has no reason to believe that the Prospectus, as amended or supplemented, if applicable (except for the financial statements and other financial data, as aforesaid) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (xviii) each Selling Shareholder is the lawful owner of the Shares to be sold by such Selling Shareholder pursuant to this Agreement and has good and clear title to such Shares, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever; (xix) each Selling Shareholder has full legal right, power and authority, and all authorization and approval required by law, to enter into this Agreement and the Custody Agreement and the Power of Attorney of such Selling Shareholder and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder in the manner provided herein and therein; (xx) the Custody Agreement of each Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, enforceable in accordance with its terms except as may be limited by the effects of applicable bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting rights and remedies of creditors generally; (xxi) the Power of Attorney of each Selling Shareholder has been duly authorized, executed and delivered by such Selling Shareholder and is a valid and binding instrument of such Selling Shareholder, enforceable in accordance with its terms except as may be limited by the effects of applicable bankruptcy, insolvency, 31 reorganization, receivership, moratorium and other similar laws affecting rights and remedies of creditors generally, and, pursuant to such Power of Attorney, such Selling Shareholder has, among other things, authorized the Attorneys, or any one of them, to execute and deliver on such Selling Shareholder's behalf this Agreement and any other document they, or any one of them, may deem necessary or desirable in connection with the transactions contemplated hereby and thereby and to deliver the Shares to be sold by such Selling Shareholder pursuant to this Agreement; (xxii) upon delivery of and payment for the Shares to be sold by each Selling Shareholder pursuant to this Agreement, good and clear title to such Shares will pass to the Underwriters, free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever; and (xxiii) the execution, delivery and performance of this Agreement and the Custody Agreement and Power of Attorney of each Selling Shareholder by such Selling Shareholder, the compliance by such Selling Shareholder with all the provisions hereof and thereof and the consummation of the transactions contemplated hereby and thereby will not (A) require any consent, approval, authorization or other order of, or qualification with, any court or governmental body or agency (except such as may be required under the securities or Blue Sky laws of the various states), (B) conflict with or constitute a breach of any of the terms or provisions of, or a default under, the organizational documents of such Selling Shareholder, if such Selling Shareholder is not an individual, or any indenture, loan agreement, mortgage, lease or other agreement or instrument to which such Selling Shareholder is a party or by which any property of such Selling Shareholder is bound or (C) violate or conflict with any applicable law or any rule, regulation, judgment, order or decree of any court or any governmental body or agency having jurisdiction over such Selling Shareholder or any property of such Selling Shareholder. The opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois) described in Section 10(f) above shall be rendered to you at the request of the Company and the Selling Shareholders and shall so state therein. Skadden, Arps, Slate, 32 Meagher & Flom (Illinois) shall rely, with your consent, solely on the opinion of Gallop, Johnson & Neuman, L.C., with respect to all matters of Missouri law. (g) You shall have received on the Closing Date an opinion, dated the Closing Date, of Katten Muchin & Zavis, counsel for the Underwriters, as to the matters referred to in Sections 10(f)(iv), 10(f)(vi) (but only with respect to the Company) and 10(f)(ix) (but only with respect to the statements under the caption "Description of Capital Stock" and "Underwriting"), and clauses 10(f)(xvii)(B), 10(f)(xvii)(C) and 10(f)(xvii)(D). In giving such opinions with respect to the matters covered by Section 10(f)(xvii), Skadden, Arps, Slate, Meagher & Flom (Illinois) and Katten Muchin & Zavis may state that their opinion and belief are based upon their participation in the preparation of or incorporation by reference into the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. (h) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from Ernst & Young LLP, independent public accountants, containing the information and statements of the type ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (i) The Company shall have delivered to you the agreements specified in Section 2 hereof which agreements shall be in full force and effect on the Closing Date. (j) The Shares shall have been duly listed for quotation, subject to notice of issuance, on the Nasdaq National Market. (k) The Company and the Selling Shareholders shall not have failed on or prior to the Closing Date to perform or comply in any material respect with any of the agreements herein contained and required to be performed or complied with by the Company or the Selling Shareholders, as the case may be, on or prior to the Closing Date. 33 (l) You shall have received on the Closing Date, a certificate of each Selling Shareholder who is not a U.S. Person (as defined under applicable U.S. federal tax legislation) to the effect that such Selling Shareholder is not a U.S. Person, which certificate may be in the form of a properly completed and executed United States Treasury Department Form W-8 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). The several obligations of the Underwriters to purchase any Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization and issuance of such Additional Shares and other matters related to the issuance of such Additional Shares. Section 11. Effectiveness of Agreement and Termination. This Agreement shall become effective upon the execution and delivery of this Agreement by the parties hereto. This Agreement may be terminated at any time on or prior to the Closing Date by you by written notice to the Sellers if any of the following has occurred: (i) any outbreak or escalation of hostilities or other national or international calamity or crisis or change in economic conditions or in the financial markets of the United States or elsewhere that, in your judgment, is material and adverse and, in your judgment, makes it impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus, (ii) the suspension or material limitation of trading in securities or other instruments on the New York Stock Exchange, the American Stock Exchange, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade or the Nasdaq National Market or limitation on prices for securities or other instruments on any such exchange or the Nasdaq National Market, (iii) the suspension of trading of any securities of the Company on any exchange or in the over-the-counter market, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects, or will materially and adversely affect, the business, prospects, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by either federal or New York State authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your 34 opinion has a material adverse effect on the financial markets in the United States. If on the Closing Date or on an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase the Firm Shares or Additional Shares, as the case may be, which it has or they have agreed to purchase hereunder on such date and the aggregate number of Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the total number of Firm Shares or Additional Shares, as the case may be, to be purchased on such date by all Underwriters, each non- defaulting Underwriter shall be obligated severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I bears to the total number of Firm Shares which all the non-defaulting Underwriters have agreed to purchase, or in such other proportion as you may specify, to purchase the Firm Shares or Additional Shares, as the case may be, which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Firm Shares or Additional Shares, as the case may be, which any Underwriter has agreed to purchase pursuant to Section 2 hereof be increased pursuant to this Section 10 by an amount in excess of one-ninth of such number of Firm Shares or Additional Shares, as the case may be, without the written consent of such Underwriter. If on the Closing Date any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased by all Underwriters and arrangements satisfactory to you, the Company and the Selling Shareholders for purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter, the Company or the Selling Shareholders. In any such case which does not result in termination of this Agreement, either you or the Sellers shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such date, the non-defaulting Underwriters shall have the option to (i) terminate 35 their obligation hereunder to purchase such Additional Shares or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase on such date in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of any such Underwriter under this Agreement. Section 12. Agreements of the Selling Shareholders. Each Selling Shareholder agrees with you and the Company: (a) To pay or to cause to be paid all transfer taxes payable in connection with the transfer of the Shares to be sold by such Selling Shareholder to the Underwriters. (b) To do and perform all things to be done and performed by such Selling Shareholder under this Agreement prior to the Closing Date and to satisfy all conditions precedent to the delivery of the Shares to be sold by such Selling Shareholder pursuant to this Agreement. Section 13. Miscellaneous. Notices given pursuant to any provision of this Agreement shall be addressed as follows: (i) if to the Company, to O'Reilly Automotive, Inc., 233 South Patterson, Springfield, Missouri 65802, Attention: David E. O'Reilly, President and Chief Executive Officer, (ii) if to the Selling Shareholders, to David E. O'Reilly c/o O'Reilly Automotive, Inc., 233 South Patterson, Springfield, Missouri 65802 and (iii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention: Syndicate Department, or in any case to such other address as the person to be notified may have requested in writing. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company, the Selling Shareholders and the several Underwriters set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, and will survive delivery of and payment for the Shares, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the officers or directors of any Underwriter, any person controlling any Underwriter, the Company, the officers or directors of the Company, any person controlling the Company, any Selling Shareholder or any person controlling such Selling Shareholder, (ii) acceptance of 36 the Shares and payment for them hereunder and (iii) termination of this Agreement. If for any reason the Shares are not delivered by or on behalf of any Seller as provided herein (other than as a result of any termination of this Agreement pursuant to Section 11), the Sellers agree, jointly and severally, to reimburse the several Underwriters for all out-of-pocket expenses (including the fees and disbursements of counsel) incurred by them. Notwithstanding any termination of this Agreement, the Company shall be liable for all expenses which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also agree, jointly and severally, to reimburse the several Underwriters, their directors and officers and any persons controlling any of the Underwriters for any and all fees and expenses (including, without limitation, the fees disbursements of counsel) incurred by them in connection with enforcing their rights hereunder (including, without limitation, pursuant to Section 9 hereof). Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Selling Shareholders, the Underwriters, the Underwriters' directors and officers, any controlling persons referred to herein, the Company's directors and the Company's officers who sign the Registration Statement and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Underwriters merely because of such purchase. This Agreement shall be governed and construed in accordance with the laws of the State of New York. This Agreement may be signed in various counterparts which together shall constitute one and the same instrument. 37 Please confirm that the foregoing correctly sets forth the agreement among the Company, the Selling Shareholders and the several Underwriters. Very truly yours, O'REILLY AUTOMOTIVE, INC. By: ___________________________ Title: ________________________ THE SELLING SHAREHOLDERS NAMED IN SCHEDULE II HERETO, ACTING SEVERALLY By: ___________________________ Attorney-in-Fact DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GEORGE K. BAUM & COMPANY WILLIAM BLAIR & COMPANY Acting severally on behalf of themselves and the several Underwriters named in Schedule I hereto By: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: ________________________ 38 SCHEDULE I ----------
Underwriters Number of Firm Shares to be Purchased Donaldson, Lufkin & Jenrette Securities Corporation George K. Baum & Company William Blair & Company Total 4,140,000
SCHEDULE II ----------- Selling Shareholders --------------------
Name Number of Firm Shares Being Sold Charles H. O'Reilly Jr. 250,000 Lawrence P. O'Reilly 195,000 David E. O'Reilly 150,000 Rosalie O'Reilly Wooten 140,000 Charles H. O'Reilly, Sr. Irrev. Trust 100,000 Charles H. O'Reilly, Sr. Irrev. Trust FBO Lindsay 60,000 Sarah O'Reilly Charles H. O'Reilly, Sr. Trust FBO Ryan C. O'Reilly 50,000 Charles H. O'Reilly Sr. Irrev. Trust FBO Austin David Lee O'Reilly 45,000 Charles H. O'Reilly, Sr. Irrev. Trust FBO Matthew David O'Reilly 45,000 Lauren P. O'Reilly 35,000 Leigh Anne O'Reilly Flisher 35,000 Lawrence P. O'Reilly, Custodian, Ragan O'Reilly UTMA/MO 35,000 --------- Total 1,140,000 =========
Annex I Charles H. O'Reilly Jr. Lawrence P. O'Reilly David E. O'Reilly Rosalie O'Reilly Wooten Charles H. O'Reilly, Sr. Irrev. Trust Charles H. O'Reilly, Sr. Irrev. Trust FBO Lindsay Sarah O'Reilly Charles H. O'Reilly, Sr. Trust FBO Ryan C. O'Reilly Charles H. O'Reilly Sr. Irrev. Trust FBO Austin David Lee O'Reilly Charles H. O'Reilly, Sr. Irrev. Trust FBO Matthew David O'Reilly Lauren P. O'Reilly Leigh Anne O'Reilly Flisher Lawrence P. O'Reilly, Custodian, Ragan O'Reilly UTMA/MO Charles H. O'Reilly, Sr. Ted F. Wise James R. Batten Jay Burchfield Joe C. Greene A-1 EX-5.1 3 OPINION OF SKADDEN, ARPS Exhibit 5.1 ----------- [Letterhead of Skadden, Arps, Slate, Meagher & Flom (Illinois)] March 10, 1999 O'Reilly Automotive, Inc. 233 South Patterson Springfield, Missouri 65802 Ladies and Gentlemen: We are acting as special counsel to O'Reilly Automotive, Inc., a Missouri corporation (the "Company"), in connection with the public offering of up to 4,761,000 shares (the "Shares") of the Company's Common Stock, par value $0.01 per share (the "Common Stock"). Of the 4,761,000 Shares, 3,000,000 Shares (the "Company Firm Shares") are being issued and sold by the Company, 1,140,000 Shares (the "Shareholder Shares") are being sold by existing shareholders (the "Selling Shareholders") and 621,000 Shares (together with the Company Firm Shares, the "Company Shares") are subject to an over-allotment option granted by the Company to the Underwriters (as defined below). Of the Shares to be sold by the Selling Shareholders, 340,000 Shares (the "Stock Option Shares") will be obtained by the Selling Shareholders pursuant to the exercise of options granted to certain of the Selling Shareholders under separate Stock Option Agreements with the Company, each dated April 22, 1994 (collectively, the "Stock Option Agreements"). This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "Act"). In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-3 (File No. 333-73377), as filed with the Securities and Exchange Commission (the "Commission") under the Act on March 3, 1999, and Amendment No. 1 thereto, as filed with the Commission on March 10, 1999 (such Registration Statement, as so amended, being hereinafter referred to as the "Registration Statement"); (ii) the form of the Underwriting Agreement (the "Underwriting Agreement") proposed to be entered into by and among the Company, as issuer, the Selling Shareholders and Donaldson, Lufkin & Jenrette Securities Corporation, William Blair & Company and George K. Baum & Company (the "Underwriters"), filed as an exhibit to the Registration Statement; (iii) the Restated Articles of Incorporation and the Amended and Restated Bylaws of the Company, as presently in effect; (iv) a specimen certificate representing the Common Stock; (v) certain resolutions of the Board of Directors of the Company (the "Resolutions"); (vi) the Company's 1993 Stock Option Plan (the "Plan"); and (vii) the Stock Option Agreements. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. In making our examination of documents executed or to be executed by parties other than the Company, we have assumed that such parties had or will have the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and due execution and delivery by such parties of such documents and the validity and binding effect thereof. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. Members of our firm are admitted to the practice of law in the State of Illinois, and we do not express any opinion as to the laws of any other jurisdiction. With respect to matters of Missouri law, we are relying, with your consent, solely on the opinion of Gallop, Johnson & Neuman, L.C., a copy of which has been delivered to you. Based upon and subject to the limitations, qualifications, exceptions and assumptions set forth herein, we are of the opinion that: 1. when (i) the Registration Statement becomes effective; (ii) appropriate resolutions have been adopted by the Pricing Committee of the Board of Directors of the Company (the "Pricing Committee"); (iii) the price at which the 2 Company Shares are to be sold to the Underwriters pursuant to the Underwriting Agreement and other matters relating to the issuance and sale of the Company Shares have been approved by the Pricing Committee in accordance with the Resolutions; (iv) the Underwriting Agreement has been duly executed and delivered; and (v) certificates representing the Company Shares in the form of the specimen certificate examined by us have been manually signed by an authorized officer of the transfer agent and registrar for the Common Stock and registered by such transfer agent and registrar, and delivered to and paid for by the Underwriters as contemplated by the Underwriting Agreement, the Company Shares will be validly issued, fully paid and nonassessable. 2. The Shareholder Shares, excluding the Stock Option Shares, have been validly issued and are fully paid and nonassessable. 3. When issued upon the exercise of options granted under the Stock Option Agreements and paid for in accordance with the terms and conditions of the Plan and the Stock Option Agreements, the Stock Option Shares will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the heading "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. Very truly yours, /s/ Skadden, Arps, Slate, Meagher & Flom (Illinois) 3 EX-5.2 4 OPINION OF GALLOP, JOHNSON & NEUMAN, L.C. Exhibit 5.2 [Letterhead of Gallop, Johnson & Neuman, L.C.] March 10, 1999 O'Reilly Automotive, Inc. 233 South Patterson Springfield, Missouri 65802 Re: Registration Statement on Form S-3 (File No. 333-73377) Ladies and Gentlemen: We have acted as special counsel for O'Reilly Automotive, Inc., a Missouri corporation (the "Company"), in connection with certain matters of Missouri law relative to the filing of a Registration Statement on Form S-3, File No. 333- 73377 (the "Registration Statement") under the Securities Act of 1933, as amended, relating to 4,761,000 shares of the common stock of the Company, $0.01 par value per share (the "Common Stock") consisting of 3,000,000 shares to be sold by the Company and 1,140,000 shares to be sold by certain of the shareholders of the Company (the "Selling Shareholders"), and an additional 621,000 shares subject to an option granted by the Company to the several underwriters to cover over-allotments (the "Additional Shares"). Of the shares of Common Stock to be sold by the Selling Shareholders, 340,000 shares (collectively, the "Stock Option Shares") will be acquired by certain of the Selling Shareholders pursuant to the exercise of options granted to such Selling Shareholders under separate Stock Option Agreements with the Company, each dated April 22, 1994 (collectively, the "Stock Option Agreements"). We have examined such corporate records of the Company, such laws and such other information as we have deemed relevant, including the Company's Restated Articles of Incorporation, Amended and Restated Bylaws, resolutions adopted by the Board of Directors of the Company, and trust instruments and other documents applicable to certain of the Selling Shareholders, all relating to the offering of the aforementioned shares and certificates received from state officials and from officers of the Company. In delivering this opinion, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to the originals of all documents submitted to us as certified, photostatic or conformed copies, and the correctness of all statements submitted to us by officers of the Company. O'Reilly Automotive, Inc. March 10, 1999 Page 2 Based solely on the foregoing, we are of the opinion that: 1. When (i) the Registration Statement becomes effective, (ii) appropriate resolutions (the "Resolutions") have been adopted by the Pricing Committee of the Board of Directors of the Company (the "Pricing Committee"), (iii) the price at which the Company Shares are to be sold to the Underwriters pursuant to the Underwriting Agreement and other matters relating to the issuance and sale of the Company Shares have been approved by the Pricing Committee in accordance with the Resolutions, (iv) the Underwriting Agreement has been duly executed and delivered, and (v) certificates representing the Company Shares in the form of the specimen certificate examined by us have been manually signed by an authorized officer of the transfer agent and registrar for the Common Stock and registered by such transfer agent and registrar, and delivered to and paid for by the Underwriters as contemplated by the Underwriting Agreement, the Common Stock being offered by the Company, including any Additional Shares, if sold and issued in the manner described in the Registration Statement, will be validly issued and outstanding and will be fully paid and non- assessable. 2. The Common Stock being offered by each of the Selling Shareholders, excluding the Stock Option Shares, have been validly issued and outstanding and are fully paid and non-assessable. 3. When issued upon the exercise of the options granted under the Stock Option Agreements and paid for in accordance with the terms and conditions of the Stock Options Agreements, the Stock Option Shares will be validly issued, fully paid and non-assessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the Registration Statement. We also consent to your filing copies of this opinion as an exhibit to the Registration Statement with agencies of such states as you deem necessary in the course of complying with the laws of such states regarding the issuance of the Common Stock sold. Very truly yours, /s/ Gallop, Johnson & Neuman, L.C. GALLOP, JOHNSON & NEUMAN, L.C. EX-23.1 5 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 ------------ Consent of Independent Auditors We consent to the references to our firm under the captions "Experts" and "Selected Consolidated Financial Data" and to the use of our report dated March 2, 1999 in Amendment No. 1 to the Registration Statement (Form S-3) and related Prospectus of O'Reilly Automotive, Inc. for the registration of 4,140,000 shares of its common stock and to the incorporation by reference therein of our reports dated February 16, 1998, with respect to the consolidated financial statements of O'Reilly Automotive, Inc. incorporated by reference in its Annual Report (Form 10-K) for the year ended December 31, 1997 and the related financial statement schedule included therein, filed with the Securities and Exchange Commission. Ernst & Young LLP Kansas City, Missouri March 9, 1999 EX-23.2 6 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our report dated January 27, 1998 on Hi-Lo Automotive, Inc.'s consolidated financial statements as included in O'Reilly Automotive, Inc.'s Amended Form 8-K as filed on April 13, 1998. Arthur Andersen LLP March 9, 1999 Houston, Texas -----END PRIVACY-ENHANCED MESSAGE-----