P a G E 0.1 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T 2 0 0 1 O‘ R E I L L Y A Y E A R O F R E C O R D P E R F O R M A N C E A M O D E L Y E A R Whether you’re a “do-it-yourselfer” or a professional installer, there’s a certain labor of love you have with your automobile. Our team members at O’Reilly Auto Parts know, understand and share this passion. From the moment you walk into one of our stores, you know you’re getting the same attention and care from our professionals that they would put into their own vehicles. It’s the passion for what we do coupled with our dual market strategy, unique distribution system, strong leadership team and our culture that has built this “Model Year.” 1 9 5 4 C O R V E T T E A Y E A R O F C L A S S I C P E R F O R M A N C E YEAR IN REVIEW O P E N E D 1 2 1 N E W S T O R E S . T E A M O ’ R E I L LY A C H I E V E D O U R 1 - 5 - U G O A L O F $ 1 B I L L I O N I N S A L E S O N E Y E A R E A R LY W I T H P R O D U C T S A L E S I N C R E A S I N G 2 2 . 7 % T O $ 1 . 0 9 B I L L I O N . A C Q U I R E D M I D - S TAT E A U T O M O T I V E D I S T R I B U T O R S , I N C . I N C L U D I N G 8 2 N E T N E W S T O R E S A N D 2 D I S T R I B U T I O N C E N T E R S . N E T I N C O M E I N C R E A S E D 2 8 . 3 % T O $ 6 6 . 4 M I L L I O N . O V E R 1 2 , 5 0 0 T E A M M E M B E R S S T R O N G . A T O TA L O F 8 7 5 S T O R E S A N D 9 D I S T R I B U T I O N C E N T E R S L O C AT E D I N 1 6 S TAT E S . A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T FINANCIAL HIGHLIGHTS (In thousands, except per share and operating data) Years ended December 31, 2001 2000 % change OPERATIONS Product Sales Operating Income Net Income FINANCIAL POSITION Working Capital Total Assets Long-Term Debt $ 1,092,112 $ 890,421 113,831 66,352 90,029 51,708 $ 429,527 $ 296,272 856,859 715,995 165,618 90,463 Shareholders’ Equity 556,291 463,731 22.7% 26.4% 28.3% 45.0% 19.7% 83.1% 20.0% Net Income Per Common Share (diluted) Weighted-Average Common Shares Outstanding (assuming dilution) OPERATING DATA Stores At Year-End Same-Store Sales Gain $ 1.26 $ 1.00 26.0% 52,786 51,728 2.1% 875 8.2% 672 30.2% 4.0% 105.0% E A R N I N G S P E R S H A R E ( A S S U M I N G D I L U T I O N ) N U M B E R O F S T O R E S P A G E 0.1 $1.26 $1.00 $0.92 1.2 1.0 0.8 0.6 0.4 0.2 $0.71 $0.54 $0.45 0.0 96 97 01 Our 10-year compound average growth rate in earnings per share is 20.8%. 99 00 98 1,000 800 600 400 200 0 875 672 571 491 259 219 96 97 98 99 00 01 Our growth plans for 2002 include opening at least 100 new stores. INSIDE: P A G E 0 . 2 : L E T T E R T O S H A R E H O L D E R S P A G E 0 . 4 : G E O G R A P H I C T E R R I T O R Y P A G E 0 . 6 : T E A M O ’ R E I L L Y P A G E 0 . 8 : D U A L M A R K E T S T R A T E G Y P A G E 0 . 1 0 : D I S T R I B U T I O N N E T W O R K P A G E 0 . 1 3 : F I N A N C I A L I N F O R M A T I O N 2 0 0 1 L E A D E R S H I P A M O D E L Y E A R This leadership team averages over 28 years of service with O’Reilly. As pictured from left to right: Greg Henslee, David O’Reilly, Ted Wise, Rosalie O’Reilly-Wooten, Larry O’Reilly and Charlie O’Reilly. P A G E 0.2 1 9 4 0 F O R D C O U P E A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T LETTER TO SHAREHOLDERS Over generations, our Company has built a strong track record of growth and performance by pursuing our mission of being the dominant supplier of auto parts in our markets. 2001 was no exception. With more than 12,500 dedicated team members having a strong focus on customer service, work ethic and our prominent culture, Team O’Reilly has completed a Model Year. In 1998, we embarked on a vision for growth called 1-5-U. It represented our mission to reach $1 billion in sales in five years. We are proud to announce that once again Team O’Reilly has risen to the challenge, meeting this goal one year early. This demonstrates the commitment of our team members and their ability to excel beyond expectations. In late 2001, O’Reilly seized a tremendous opportunity with our acquisition of Mid-State Automotive Distributors, Inc. The We continue to find new ways to utilize TeamNet, our intranet system and reduce the cost associated with printed materials while improving communications with our stores. A lot of hard work by Team O’Reilly produced another year of strong financial results. Product sales of $1.09 billion,an increase of 22.7%, a 10.4% operating margin and net income growth of 26.0% highlight this Model Year. Approximately 56% of product sales were generated from the do-it-yourself or retail trade, and approximately 44% of product sales were generated from the professional installer market. We continue our focus on this dual-market strategy with a goal of 50% from each market. O’Reilly has positioned itself for the opportunities ahead. Our plans for 2002 include opening at least 100 new stores and same store sales objectives in the mid single-digit range. We acquisition provided strategic and contiguous growth for our will continue to leverage our technology investment in the area Company throughout seven additional states, added 82 net new of inventory control. Our goal is to achieve inventory turns of stores, two distribution centers and over 1,800 new experienced 1.7 times, an operating margin of 11% or greater and top line team members. In addition to our acquisition of Mid-State, sales growth of approximately 18-20%. we added 121 new stores, bringing our total store count to We look forward to taking the opportunities that lie ahead in 875 throughout 16 states. 2002 and converting them to shareholder value. Team O’Reilly has We continue to make improvements in our use of technology. a successful track record of responding to these opportunities Our Global Inventory System has increased the availability of as we strive to be the dominant auto part supplier in our markets. parts to our customers by giving our stores visibility to inventory Thank you for taking time to learn more about Team O’Reilly and at all distribution centers and other stores. This system also for your continued support and confidence. reduces inventory levels at both stores and distribution centers. CHARLIE O’REILLY DAVID O’REILLY LARRY O’REILLY VICE CHAIRMAN OF THE BOARD CHIEF EXECUTIVE OFFICER & CO-CHAIRMAN OF THE BOARD CHIEF OPERATING OFFICER & CO-CHAIRMAN OF THE BOARD ROSALIE O’REILLY- WOOTEN EXECUTIVE VICE PRESIDENT TED WISE GREG HENSLEE CO-PRESIDENT CO-PRESIDENT O’REILLY EXECUTIVE COMMITTEE C.H. CHUB O’REILLY 44 YEARS CHAIRMAN EMERITUS JERRY SKAGGS 41 YEARS VICE PRESIDENT SALES MIKE WILLIAMS 32 YEARS VICE PRESIDENT INFORMATION SYSTEMS TRICIA HEADLEY 24 YEARS VICE PRESIDENT CORPORATE SERVICES & CORPORATE SECRETARY ALAN FEARS 19 YEARS VICE PRESIDENT EXPANSION ACQUISITIONS STEVE POPE 14 YEARS VICE PRESIDENT HUMAN RESOURCES JEFF SHAW 11 YEARS VICE PRESIDENT SOUTHERN DIVISION PAT O’REILLY 10 YEARS VICE PRESIDENT DISTRIBUTION JIM BATTEN 9 YEARS VICE PRESIDENT FINANCE & CFO MIKE SWEARENGIN 8 YEARS VICE PRESIDENT MERCHANDISE RON BYERLY 7 YEARS VICE PRESIDENT MARKETING, ADVERTISING & TRAINING P A G E 0.3 875 LOCATIONS DISTRIBUTION CENTERS L I T T L E R O C K , A R K A N S A S D E S M O I N E S , I O W A K A N S A S C I T Y, M I S S O U R I S P R I N G F I E L D , M I S S O U R I O K L A H O M A C I T Y, O K L A H O M A K N O X V I L L E , T E N N E S S E E N A S H V I L L E , T E N N E S S E E D A L L A S , T E X A S H O U S T O N , T E X A S P A G E 0.4 MID-STATE ACQUISITION S t a t e s I N D I A N A K E N T U C K Y T E N N E S S E E M I S S I S S I P P I A L A B A M A G E O R G I A F L O R I D A # o f S t o r e s A d d e d 5 7 4 0 5 1 6 5 4 Time and time again, Team O’Reilly has demonstrated its ability to successfully build and acquire new stores. This year was no exception. We added 121 new stores and successfully completed our acquisition of Mid-State Automotive Distributors, Inc., for an additional 82 stores making a total of 203 stores added in 2001. Our tradition of aggressive growth will continue throughout 2002 with the planned opening of 100 new stores. The acquisition of Mid-State was a great fit for O’Reilly. Mid-State had been in business for 33 years with a strong wholesale hard parts background and independently owned jobber store business. The seven contiguous states, 82 stores and two strategically located distribution centers set the stage for our future growth. The conversion of the Mid-State stores to O’Reilly Auto Parts stores will build on the established professional installer business while creating growth opportunities in the retail business. A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T T O T A L S T O R E S Q U A R E F O O T A G E A T Y E A R - E N D ( a ) ( I N T H O U S A N D S ) P E R C E N T A G E I N C R E A S E I N S A M E S T O R E P R O D U C T S A L E S ( b ) 6,000 5,000 4,000 3,000 2,000 1,000 0 5,882 4,491 3,777 3,172 1,454 1,155 96 97 98 99 00 01 15 12 9 6 3 0 14.4% 9.6% 8.2% 6.8% 6.8% 4.0% 96 97 98 99 00 01 (a) total square footage includes normal selling, office, stockroom and receiving space. (b) for stores opened in two full periods. O’Reilly stores feature modern fixtures and state-of-the-art merchan- dising, showcasing our large inventory of auto parts, chemicals, tools and accessories. B R A N D S , L O C A T I O N S , S E R V I C E . . . O ' R E I L L Y D E L I V E R S When our customers walk into any O’Reilly store, they get a feeling of knowing that every store is designed and laid out with consistency to best serve their needs. Our Hi-5 program ensures that each O’Reilly customer will be welcomed within the first five steps of entering the store and that we will provide the best customer service possible. P A G E 0.5 2 0 0 1 O ’ R E I L L Y T E A M M E M B E R S A M O D E L Y E A R P A G E 0.6 The team concept is a critical part of the O’Reilly business plan. It takes the entire team to get the right parts to our customers. The personal, professional service received by our customers provides us with a competitive edge, and our model team members provide the very best. Our team embraces the ten values of the O’Reilly Culture: respect, honesty, teamwork, expense control, hard work, professionalism, enthusiasm, excellent customer service, dedication and a win-win attitude. 1 9 5 9 C A D I L L A C E L D O R A D O A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T The overriding priority for the O'Reilly Information Systems team members is to support the customer service needs of the store network by managing our tremendous data warehouse and providing the best possible point-of-sale support. P A G E 0.7 OVER 12,500 TEAM MEMBERS The strong financial results of this Model This knowledge and dedication to customer Year could not be achieved without the service is what makes our team members dedication, knowledge, work ethic and “Professional Parts People.” team spirit of our more than 12,500 team Our training programs, promote-from- members. As our Company grows, so within philosophy and dedication to treating does our dedication and commitment to our team members fairly all contribute to our culture and the team concept. It is the longevity of our team. one of the most critical elements of our Managing our Company’s aggressive success. Every new team member growth while maintaining control of receives orientation training designed expenses and profitability is a challenge to instill in them the key values and our leadership team faces head-on. Our behaviors that have come to be known senior management team consists of 49 as the O’Reilly Culture. highly skilled and qualified individuals who We continue to invest in our No. 1 average greater than 18 years of service resource, our team members, with a with O’Reilly. Many senior managers, variety of training. Both do-it-yourself including our two co-presidents, have and professional installers rely on our worked their way up from entry level team member‘s extensive knowledge. positions within the Company. The O’Reilly customer support department assures our ability to source the right part at the right price … everytime. 2 0 0 1 D U A L M A R K E T S T R A T E G Y A M O D E L Y E A R P A G E 0.8 Of the $1.09 billion in product sales in 2001, 44% was generated from our professional installer market. O’Reilly provides a broad inventory availability with over 100,000 SKUs (stock keeping units). This lets our customers know they can count on the O’Reilly name to deliver! 1 9 6 5 S H E L B Y C O B R A A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T TWO MARKETS, ONE BILLION IN SALES The O'Reilly customer knows that our team members can provide expert advice and trouble-shooting assistance for a wide variety of automotive maintenance needs. P A G E 0.9 Once again, Team O’Reilly delivers! In professional installers. Our DIY customers 1998 we began the quest toward our 1-5-U appreciate and rely on the knowledge of goal of $1 billion in sales within five years. our professional parts people, convenient In 2001, we achieved our goal one year locations and comfort in knowing that at early. Product sales reached over $1.09 O’Reilly they will get the lowest price, billion in 2001 making it our ninth year of guaranteed. Our professional installer record sales since becoming a public customer trusts in O’Reilly for our support company. Competitive pricing, dual market programs, broad inventory availability strategy and efforts from every team and the best value in equipment, tools member helped make 2001 a Model Year. and parts. Serving both of these markets At O’Reilly, we work hard to serve all provides a greater opportunity to serve a customers in our markets, trying to keep large number of customers. approximately a 50/50 blend between do-it-yourself (“DIY”) customers and Many of our Professional Parts People are ASE certified to ensure that every customer gets the right part, for the right price, guaranteed! 2 0 0 1 D I S T R I B U T I O N N E T W O R K A M O D E L Y E A R P A G E 0.10 Our sophisticated point-of-sale system allows stores to order hard-to-find parts directly from one of our nine distribution centers. Once a part has been ordered, our advanced inventory control system and handling technology allow the part to be picked and delivered to the store and to our customer within 24 hours. 1 9 3 5 F O R D C O U P E A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T Our industry-leading distribution network supports the daily delivery of customer- ordered parts to every store in 24 hours or less. UNIQUE DISTRIBUTION SYSTEM Our unique distribution system starts with store opens the next morning, or better our No. 1 priority, our customer. When one yet, the same day in many markets. of our valued customers needs a hard-to- Over 2,330 O’Reilly team members find part, store team members use our work around the clock in our distribution dynamic inventory management system to centers to provide exceptional service to search the inventory of distribution centers our stores. Our nine strategically located as well as other stores to locate and order distribution centers, including the two the part. The order is automatically distribution centers from the Mid-State generated at one of our distribution acquisition, provide nightly deliveries to centers where the part is picked, packed every O’Reilly store. These distribution and put on one of our 159 trucks that centers have 1,465,403 square feet of deliver merchandise to every O’Reilly space to house over 100,000 SKUs (stock store, every night. That hard-to-find part keeping units) and ensure that our is ready for our customer by the time our customers get the right part for the right price at the right time. Advanced technological equipment, such as these rotating carousels, helps in filling orders efficiently and speeding parts on their way for nightly delivery to O'Reilly stores. P A G E 0.11 1 9 5 7 F O R D T H U N D E R B I R D A M O D E L Y E A R L o o k i n g b a c k o n a p r o u d p a s t … l o o k i n g f o r w a r d t o a g r e a t f u t u r e . P A G E 0.12 2 0 0 2 F O R D T H U N D E R B I R D A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T SELECTED CONSOLIDATED FINANCIAL DATA (In thousands, except per share data) YEARS ENDED DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 INCOME STATEMENT DATA Product sales Cost of goods sold, including $1,092,112 $890,421 $754,122 $616,302 $316,399 $259,243 $201,492 $167,057 $137,164 $110,147 warehouse and distribution expenses 624,294 507,720 428,832 358,439 181,789 150,772 116,768 97,758 82,102 65,066 Gross profit 467,818 382,701 325,290 257,863 134,610 108,471 84,724 69,299 55,062 45,081 Operating, selling, general and administrative expenses Operating income Other income (expense), net Provision for income taxes Income from continuing operations before cumulative effects of changes in accounting principles Cumulative effects of changes in accounting principles 353,987 292,672 248,370 200,962 97,526 79,620 62,687 52,142 42,492 35,204 113,831 90,029 76,920 56,901 37,084 (7,104) 40,375 (6,870) (3,896) (6,958) 472 31,451 27,385 19,171 14,413 28,851 1,182 11,062 22,037 17,157 12,570 236 8,182 376 6,461 216 4,556 9,877 204 3,686 66,352 51,708 45,639 30,772 23,143 18,971 14,091 11,072 8,230 6,395 – – – – – – – – – (163) Income from continuing operations 66,352 51,708 45,639 30,772 23,143 18,971 14,091 11,072 Income from discontinued operations – – – – – – – – 8,230 48 6,232 129 Net income $ 66,352 $ 51,708 $ 45,639 $ 30,772 $ 23,143 $ 18,971 $ 14,091 $ 11,072 $ 8,278 $ 6,361 BASIC EARNINGS PER COMMON SHARE Income per share from continuing operations before cumulative effects of changes in accounting principles Income per share from continuing operations Income per share from discontinued operations Net income per share $ $ $ 1.27 1.27 – 1.27 $ $ $ 1.01 1.01 – 1.01 $ $ $ 0.94 0.94 – 0.94 $ $ $ 0.72 0.72 – 0.72 $ $ $ 0.55 0.55 – 0.55 $ $ $ 0.45 $ 0.40 0.45 $ 0.40 – – 0.45 $ 0.40 $ $ $ 0.32 $ 0.25 0.32 $ 0.25 – – 0.32 $ 0.25 $ $ $ 0.22 0.21 0.01 0.22 Weighted-average common shares outstanding 52,121 51,168 48,674 42,476 42,086 41,728 35,640 34,620 32,940 29,436 EARNINGS PER COMMON SHARE – ASSUMING DILUTION Income per share from continuing operations before cumulative effects of changes in accounting principles Income per share from continuing operations Income per share from discontinued operations Net income per share Weighted-average common shares outstanding – adjusted (e) $ $ $ 1.26 1.26 – 1.26 $ $ $ 1.00 1.00 – 1.00 $ $ $ 0.92 0.92 – 0.92 $ $ $ 0.71 0.71 – 0.71 $ $ $ 0.54 0.54 – 0.54 $ $ $ 0.45 $ 0.39 0.45 $ 0.39 – – 0.45 $ 0.39 $ $ $ 0.32 $ 0.25 0.32 $ 0.25 – – 0.32 $ 0.25 $ $ $ 0.22 0.21 0.01 0.22 52,786 51,728 49,715 43,204 42,554 42,064 35,804 34,778 33,046 29,436 Page 13 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED) (In thousands, except selected operating data) YEARS ENDED DECEMBER 31, 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 SELECTED OPERATING DATA: Number of stores at year-end(a) Total store square footage at year-end (in 000’s)(b) 875 5,882 672 4,491 571 3,777 491 3,172 259 1,454 219 1,155 188 923 165 785 145 671 Weighted-average product sales per store (in 000’s)(b) Weighted-average product sales per square foot (b) (f) Percentage increase in same-store product sales open two full periods(c) Percentage increase in same-store product sales open one year(d) BALANCE SHEET DATA: Working capital Total assets Short-term debt Long-term debt, less current portion Long-term debt related to discontinued operations, less current portion $ $ 1,425 213.0 $ $ 1,412 212.6 $ $ 1,423 216.5 $ $ 1,368 238.0 $ $ 1,306 235.8 $ $ 1,239 242.2 $ $ 1,101 227.3 $ $ 1,007 $ 949 215.4 $ 208.7 8.2% 4.0% 9.6% 6.8% 6.8% 14.4% 8.9% 8.9% 14.9% 11.4% 8.8% 5.0% $429,527 $ 296,272 $ 249,351 $ 208,363 $ 93,763 $ 74,403 $ 80,471 $ 41,416 $ 41,193 $ 15,251 715,995 610,442 493,288 247,617 183,623 153,604 87,327 73,112 58,871 856,859 16,843 165,618 49,121 90,463 19,358 90,704 13,691 130 170,166 22,641 3,154 237 231 358 – 311 461 – 495 732 3,462 2,668 – 9,873 – – – – – – 127 571 838 187.2 $ $ Shareholders’ equity $556,291 $ 463,731 $ 403,044 $ 218,394 $ 182,039 $ 155,782 $ 133,870 $ 70,224 $ 57,805 $ 29,281 (a) The number of stores at year-end 1992 are net of the combinations of two (d) Beginning January 2000, same-store product sales data are calculated stores located within one mile of each other. Two stores were closed based on the change in product sales of stores open at least one year. during 1997, one was closed in 1998 and one was closed in 2000. No Percentage increase in same-store product sales is calculated based on other stores were closed during the periods presented. Additionally, store sales results, which exclude sales of specialty machinery, sales by seven former Hi/LO stores located in California were sold in 1998. outside salesmen and sales to employees. (b) Total square footage includes normal selling, office, stockroom and (e) There was no additional dilution until 1993 when options were first granted. receiving space. Weighted-average product sales per store and per square foot are weighted to consider the approximate dates of store openings or expansions. (f) 1998 does not include stores acquired from Hi/LO. Consolidated weighted- average product sales per square foot were $207.3. (c) Same-store product sales data are calculated based on the change in product sales of only those stores open during both full periods being compared. Percentage increase in same-store product sales is calculated based on store sales results, which exclude sales of specialty machinery, sales by outside salesmen and sales to employees. Page 14 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition, results of team members, administrative office occupancy expenses, data operations and liquidity, and capital resources should be read in processing, professional expenses and other related expenses. conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this annual report. We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both do-it-yourself (“DIY”) customers and professional installers. Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items and accessories, and a complete line of autobody paint and related materials, automotive tools and professional service equipment. Beginning in January 2000, we calculate same-store product sales based on the change in product sales for stores open at least one year. We also calculate same-store product sales based on the change in product sales of only those stores open during both full periods being compared. We calculate the percentage increase in both same-store product sales methods 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 CRITICAL ACCOUNTING POLICIES The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend the business activities of our company. To aid in that understanding, management has identified our “critical accounting policies”. These policies have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature. • Cost of goods sold– Cost of goods sold includes estimates of shortages that are adjusted upon physical inventory counts in subsequent periods and estimates of amounts due from vendors for certain merchandise allowances and rebates. These estimates are consistent with historical experience. • Operating, selling, general and administrative expense – Operating, selling, general and administrative expense includes estimates for worker’s compensation and other general liability obligations, which are partially based on estimates of certain claim costs and historical experience. • Credit Operations – Allowance for doubtful accounts is estimated based on historical loss ratios and consistently have been within management’s expectations. • Revenue – We recognize sales upon shipment of the products. Page 15 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS Other expense, net, increased by $234,000 from $6.9 million in The following table sets forth certain income statement data as a 2000 to $7.1 million in 2001. The increase was primarily due to interest percentage of product sales for the years indicated: expense on increased debt levels related to the issuing of $100 million YEARS ENDED DECEMBER 31, 2001 2000 1999 Product sales 100.0% 100.0% 100.0% Cost of goods sold, including warehouse and distribution expenses Gross profit Operating, selling, general and administrative expenses Operating income Other expense, net Income before income taxes Provision for income taxes 57.2 42.8 32.4 10.4 (0.6) 9.8 3.7 57.0 43.0 32.9 10.1 (0.8) 9.3 3.5 56.9 43.1 32.9 10.2 (0.5) 9.7 3.6 of senior notes, partially offset by lower interest expense on borrow- ings under the revolving credit facility due to lower interest rates. Provision for income taxes increased from $31.5 million in 2000 (37.8% effective tax rate) to $40.4 million in 2001 (37.8% effective tax rate). The increase in the dollar amount was due to the increase in the amount of income before income taxes. Principally as a result of the foregoing, net income in 2001 was $66.4 million (or 6.1% of product sales), an increase of $14.6 million (or 28.3%) from net income in 2000 of $51.7 million (or 5.8% of Net income 6.1% 5.8% 6.1% product sales). 2001 COMPARED TO 2000 2000 COMPARED TO 1999 Product sales increased $201.7 million, or 22.7% from $890.4 million Product sales increased $136.3 million, or 18.1% from $754.1 million in 2000 to $1.09 billion in 2001, primarily due to 121 net additional in 1999 to $890.4 million in 2000, due to 101 net additional stores stores opened during 2001, an 8.8% increase in same-store product opened during 2000 and a $28.0 million, or 4.0% increase in same- sales for stores open at least one year and the acquisition of 82 store product sales for stores opened in both full periods. We believe stores in connection with the purchase of Mid-State, effective that the increased product sales achieved by the existing stores are October 1, 2001. We believe that the increased product sales the result of our offering of a broader selection of products in most achieved by the existing stores are the result of our offering of stores, an increased promotional and advertising effort through a a broader selection of products in most stores, an increased variety of media and localized promotional events, and continued promotional and advertising effort through a variety of media and improvement in the merchandising and store layouts of most stores. localized promotional events, and continued improvement in the Also, our continued focus on serving professional installers con- merchandising and store layouts of most stores. Also, our continued tributed to increased sales. focus on serving professional installers contributed to increased sales. Gross profit increased 17.6% from $325.3 million (or 43.1% of Gross profit increased 22.2% from $382.7 million (or 43.0% of product sales) in 1999 to $382.7 million (or 43.0% of product sales) product sales) in 2000 to $467.8 million (or 42.8% of product sales) in 2000. in 2001. Operating, selling, general and administrative expenses Operating, selling, general and administrative expenses increased increased $44.3 million from $248.4 million (or 32.9% of product sales) $61.3 million from $292.7 million (or 32.9% of product sales) in 2000 in 1999 to $292.7 million (or 32.9% of product sales) in 2000. to $354.0 million (or 32.4% of product sales) in 2001. The increase The increase in these expenses in dollar amount was primarily in these expenses in dollar amount was primarily attributable to attributable to increased salaries and benefits, rent and other costs increased salaries and benefits, rent and other costs associated associated with the addition of employees and facilities to support with the addition of employees and facilities to support the increased the increased level of our operations. level of our operations. Page 16 Other expense, net, increased by $3.0 million from $3.9 million in On December 15, 2000, we entered into a $50 million Synthetic 1999 to $6.9 million in 2000. The increase was primarily due to interest Operating Lease Facility (“the Facility”) with a group of financial expense on increased borrowings under our credit facility. institutions. Under the Facility, the Lessor acquires land to be Provision for income taxes increased from $27.4 million in 1999 developed for O’Reilly Auto Parts stores and funds our development (37.5% effective tax rate) to $31.5 million in 2000 (37.8% effective tax thereof as the Construction Agent and Guarantor. We subsequently rate). The increase in the dollar amount was primarily due to the lease the property from the lessor for an initial term of five years and increase of income before income taxes. The nominal increase in the have the option to request up to two additional successive renewal effective tax rate was primarily due to changes in the apportionment periods of five years each from the lessor, although the lessor is of sales between states with differing tax rates. not obligated to grant us either renewal period. The Facility provides Principally as a result of the foregoing, net income in 2000 was for a residual value guarantee of approximately $36.6 million at $51.7 million (or 5.8% of product sales), an increase of $6.1 million December 31, 2001, and purchase options on the properties. It also (or 13.3%) from net income in 1999 of $45.6 million (or 6.1% of contains a provision for an event of default whereby the Lessor, product sales). LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $50.0 million in 2001, $5.8 million in 2000 and $31.6 million in 1999. The increase in cash provided by operating activities in 2001 compared to 2000 is largely the result of smaller increases in inventory, increased net income and, to a lesser extent, increased accrued benefits and withholdings. This increase in cash provided by operating activities in 2001 compared to 2000 was partially offset by the increase in amounts receivable from vendors and a decrease in accounts payable and other current liabilities. The decrease in cash provided by operating activities in 2000 compared to 1999 is the result of an increase in inventory and, to a lesser extent, increases in accounts receivable and amounts receivable from vendors, partially offset by increases in net income, accounts payable and accrued payroll. Net cash used in investing activities was $77.8 million in 2001, $40.5 million in 2000 and $79.7 million in 1999. The increase in cash used in investing activities in 2001 was largely due to the purchase of Mid-State as discussed in Note 2 of the consolidated financial statements, and a significant reduction in the amount of proceeds received from the sale of property and equipment. The decrease in cash used in 2000 compared to 1999 was primarily due to proceeds from the sale of 90 properties for $52.3 million in a sale-leaseback transaction. among other things, may require us to purchase any or all of the properties. We are utilizing the Facility to finance a portion of our store growth. Funding under the Facility at December 31, 2001 and 2000, totaled $43.0 million and $1.0 million, respectively. On December 29, 2000, we completed a sale-leaseback transaction. Under the terms of the transaction, we sold 90 properties, including land, buildings and improvements, for $52.3 million. The lease, which is being accounted for as an operating lease, provides for an initial lease term of 21 years and may be extended for one ten-year period and two additional successive periods of five years each. The resulting gain of $4.5 million has been deferred and is being amortized over the initial lease term. Net rent expense during the initial lease term is approximately $5.5 million annually and is included in the table of future minimum annual rental commitments under noncancelable operating leases. Proceeds from the transaction were used to reduce outstanding borrowings under our revolving credit facility. In August 2001, the Company completed a sale-leaseback with O’Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company). The transaction closed on September 1, 2001, with a purchase price of approximately $5.6 million for nine O’Reilly Auto Parts stores and did not result in a material gain or loss. The lease, which has been accounted for as an operating lease, calls for an initial term of 15 years with three five-year renewal options. Capital expenditures were $68.5 million in 2001, $82.0 million in 2000 and $86.0 million in 1999. These expenditures were primarily Page 17 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) related to the opening of new stores, as well as the relocation or respectively, of the revolving credit facility and $15 million and remodeling of existing stores. We opened 121, 101 and 80 net stores $27.5 million, respectively, of the term loan were outstanding. The in 2001, 2000 and 1999, respectively. We also acquired 82 stores in credit facility, which bears interest at LIBOR plus 0.50% (2.43% at connection with the purchase of Mid-State, effective October 1, 2001. December 31, 2001), expires in January 2003. We remodeled or relocated 16 stores in 2001 and 8 stores in both Our contractual obligation, including commitments for future 2000 and in 1999. Four new distribution centers were acquired: two payments under non-cancelable lease arrangements and short in October 2001, located in Nashville, Tennessee, and Knoxville, and long-term debt arrangements, are summarized below and Tennessee; one in October 2000, located in Little Rock, Arkansas; are fully disclosed in Notes 5, 6 and 7 to the consolidated financial and the other in December 1999, located in Dallas, Texas. statements. We have not participated in, nor secured financings Our continuing store expansion program requires significant for any unconsolidated special purpose entities. capital expenditures and working capital principally for inventory requirements. The costs associated with the opening of a new store (In thousands) (including the cost of land acquisition, improvements, fixtures, inventory and computer equipment) are estimated to average approximately $900,000 to $1.1 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site. Although the cost to acquire the business of an independently owned parts store varies, depending primarily upon the amount of inventory and the amount, if any, of real estate being acquired, we estimate that the average cost to acquire such a business and convert it to one of our stores is approximately $400,000. We plan to finance our expansion program through cash expected to be provided from operating activities and available borrowings under our existing credit facilities. On November 4, 1999, the Board of Directors declared a PAYMENTS DUE BY PERIOD TOTAL LESS THAN 1 YEAR 2-3 YEARS 4-5 AFTER YEARS 5 YEARS Notes payable Long-term debt $ 5,165 $ 5,074 $ 86 $ 5 $ – 176,436 11,261 65,125 75,029 25,021 Capital lease obligations 860 509 351 – – Operating leases Unconditional 216,103 24,838 41,077 30,546 119,642 purchase commitments 22,349 22,349 – – – Total contractual cash obligations $420,913 $64,031 $106,639 $105,580 $144,663 We believe that our existing cash, short-term investments, cash expected to be provided by operating activities, available bank credit facilities and trade credit will be sufficient to fund both our short-term and long-term capital needs for the foreseeable future. two-for-one stock split effected in the form of a 100% stock dividend 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. to all shareholders of record as of November 15, 1999. The stock dividend was paid on November 30, 1999. In March 1999, we sold 7,002,000 shares of common stock through a secondary public offering. The net proceeds from that offering, which amounted to $124.6 million, were used to repay a portion of our outstanding indebtedness under our bank credit facilities and to fund our expansion. In order to fund the Hi/Lo acquisition, our continuing store expansion program, and our working capital and general corporate needs, we replaced our lines of credit in January 1998 with an unsecured, five-year syndicated credit facility of $175 million. The credit facility was reduced to $165 million in 1999, $152.5 million in 2000 and $140 million in 2001. The facility is currently comprised of a revolving credit facility of $125 million and a term loan of $15 million. The credit facility is guaranteed by all of our subsidiaries. At December 31, 2001 and 2000, $61,350,000 and $74,755,000, Page 18 QUARTERLY RESULTS NEW ACCOUNTING STANDARDS The following table sets forth certain quarterly unaudited operating In June 2001, the Financial Accounting Standards Board issued data for fiscal 2001 and 2000. The unaudited quarterly information Statement of Financial Accounting Standards No. 142, Goodwill and includes all adjustments which management considers necessary for Other Intangible Assets, effective for fiscal years beginning after a fair presentation of the information shown. December 15, 2001. Under the new rules, goodwill will no longer The unaudited operating data presented below should be read be amortized but will be subject to annual impairment tests in in conjunction with our consolidated financial statements and related accordance with the Statement. Other identifiable intangible assets notes included elsewhere in this annual report, and the other financial will continue to be amortized over their useful lives or, if they have information included here. The reclassifications of certain amounts indefinite lives, such identifiable assets will not be amortized but will have been made to the 2001 consolidated financial quarterly results be subject to annual impairment tests. We will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. Application of the provisions of the Statement are not expected to have a material impact on our financial condition or results of operations. shown below. (In thousands, except per share data) FISCAL 2001 Product sales Gross profit Operating income Net income Basic net income per common share Net income per common share – assuming dilution (In thousands, except per share data) FISCAL 2000 Product sales Gross profit Operating income Net income Basic net income per common share Net income per common share – assuming dilution FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER $239,063 $280,676 $293,996 $278,377 102,426 117,789 125,287 122,316 21,732 12,317 30,758 17,987 34,142 20,140 27,199 15,908 0.24 0.24 0.35 0.34 0.38 0.38 0.30 0.30 FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER $195,758 $226,359 $251,413 $216,891 84,712 19,486 11,567 0.23 0.23 97,261 24,793 14,359 0.28 0.28 105,863 28,805 16,572 0.32 0.32 94,865 16,945 9,210 0.18 0.18 Page 19 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) DECEMBER 31, ASSETS Current assets: Cash Short-term investments Accounts receivable, less allowance for doubtful accounts of $1,760 in 2001 and $135 in 2000 Amounts receivable from vendors Inventory Refundable income taxes Deferred income taxes Other current assets Total current assets Property and equipment, at cost: Land Buildings Leasehold improvements Furniture, fixtures and equipment Vehicles Accumulated depreciation and amortization Net property and equipment Notes receivable Other assets, net Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Notes payable to bank Income taxes payable Accounts payable Accrued payroll Accrued benefits and withholdings Other current liabilities Current portion of long-term debt Total current liabilities Long-term debt, less current portion Deferred income taxes Other liabilities Commitments and contingencies Shareholders’ equity: Preferred stock, $0.01 par value: Authorized shares – 5,000,000 Issued and outstanding shares – none Common stock, $0.01 par value: Authorized shares – 90,000,000 Issued and outstanding shares – 52,850,713 in 2001 and 51,544,879 in 2000 Additional paid-in capital Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity See Notes to Consolidated Financial Statements. Page 20 2001 2000 $ 15,041 $ 9,204 500 41,486 38,440 447,793 168 3,908 3,327 500 32,673 29,175 372,069 92 1,402 4,089 550,663 449,204 48,096 121,250 45,456 143,046 34,517 392,365 103,361 289,004 2,557 14,635 46,740 109,835 34,750 106,068 25,628 323,021 76,167 246,854 2,836 17,101 $856,859 $715,995 $ 5,000 $ 35,000 – 61,875 12,866 14,038 15,514 11,843 1,011 68,947 9,309 9,360 15,184 14,121 121,136 152,932 165,618 9,141 4,673 – – 528 256,795 298,968 556,291 90,463 4,086 4,783 – – 515 230,600 232,616 463,731 $856,859 $715,995 CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) YEARS ENDED DECEMBER 31, Product sales Cost of goods sold, including warehouse and distribution expenses Operating, selling, general and administrative expenses Operating income Other income (expense): Interest expense Interest income Other, net Income before income taxes Provision for income taxes Net income Basic income per common share: Net income per common share Weighted-average common shares outstanding Income per common share – assuming dilution: Net income per common share – assuming dilution Adjusted weighted-average common shares outstanding See Notes to Consolidated Financial Statements. 2001 2000 1999 $1,092,112 $890,421 $754,122 624,294 353,987 978,281 113,831 (9,092) 1,362 626 (7,104) 106,727 40,375 507,720 292,672 800,392 90,029 (8,362) 439 1,053 (6,870) 83,159 31,451 428,832 248,370 677,202 76,920 (5,343) 402 1,045 (3,896) 73,024 27,385 $ 66,352 $ 51,708 $ 45,639 $ 1.27 $ 1.01 $ 0.94 52,121 51,168 48,674 $ 1.26 $ 1.00 $ 0.92 52,786 51,728 49,715 Page 21 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Balance at December 31, 1998 Issuance of common stock through secondary offering Issuance of common stock under employee benefit plans Issuance of common stock under stock option plans Tax benefit of stock options exercised Two-for-one stock split Net income Balance at December 31, 1999 Issuance of common stock under employee benefit plans Issuance of common stock under stock option plans Tax benefit of stock options exercised Net income Balance at December 31, 2000 Issuance of common stock under employee benefit plans Issuance of common stock under stock option plans Tax benefit of stock options exercised Net income Balance at December 31, 2001 See Notes to Consolidated Financial Statements. ADDITIONAL COMMON STOCK PAID-IN RETAINED SHARES PAR VALUE CAPITAL EARNINGS TOTAL 42,700 7,002 176 922 – – – 50,800 364 381 – – 51,545 223 1,083 – – $213 35 1 5 – 254 – 508 3 4 – – 515 2 11 – – $ 82,658 124,535 3,829 6,521 4,085 – – $135,523 – – – – (254) 45,639 221,628 180,908 4,535 3,460 977 – 230,600 4,856 14,924 6,415 – – – – 51,708 232,616 – – – 66,352 $218,394 124,570 3,830 6,526 4,085 – 45,639 403,044 4,538 3,464 977 51,708 463,731 4,858 14,935 6,415 66,352 52,851 $528 $256,795 $298,968 $556,291 Page 22 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) YEARS ENDED DECEMBER 31, Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization Provision for doubtful accounts Loss (gain) on sale of property and equipment Deferred income taxes Common stock contributed to employee benefit plans Tax benefit of stock options exercised Changes in operating assets and liabilities, net of the effects of the acquisition: Accounts receivable Amounts receivable from vendors Inventory Refundable income taxes Other current assets Accounts payable Income taxes payable Accrued payroll Accrued benefits and withholdings Other current liabilities Other liabilities Net cash provided by operating activities Investing activities Purchases of property and equipment Proceeds from sale of property and equipment Acquisition, net of cash acquired Payments received on notes receivable Advances made on notes receivable Investment in other assets Net cash used in investing activities Financing activities Borrowings on notes payable to bank Payments on notes payable to bank Proceeds from issuance of long-term debt Principal payments on long-term debt Net proceeds from secondary offering Net proceeds from issuance of common stock Net cash provided by financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year See Notes to Consolidated Financial Statements. 2001 2000 1999 $ 66,352 $ 51,708 $ 45,639 28,963 23,846 17,619 1,581 2,635 (158) 6,371 2,690 6,415 (3,432) (7,908) (35,115) (76) 1,244 (16,891) (1,011) 3,557 4,678 (9,756) (110) 50,029 (68,521) 8,534 (20,536) 721 – 1,956 (77,846) 5,000 (35,000) 289,974 (243,422) – 17,102 33,654 5,837 9,204 966 1,235 220 3,245 2,648 977 (7,446) (3,191) (78,145) 2,241 (444) 4,062 1,011 3,031 (1,022) 870 20 5,832 (81,987) 52,861 – 604 – (11,995) (40,517) 30,000 – 431,159 (432,415) – 5,354 34,098 (587) 9,791 283 961 (82) 5,455 2,339 4,085 157 (1,644) (47,912) 693 734 (1,852) – 1,479 2,038 3,386 (1,732) 31,646 (86,002) 7,039 – 1,265 (70) (1,931) (79,699) 7,130 (7,130) 172,892 (249,363) 124,570 8,017 56,116 8,063 1,728 $ 15,041 $ 9,204 $ 9,791 Page 23 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business O’Reilly Automotive, Inc. (‘’the Company’’) is a specialty retailer provided for in the Company’s consolidated financial statements and consistently have been within management’s expectations. and supplier of automotive aftermarket parts, tools, supplies and Property and Equipment accessories to both the ‘’DIY’’ customer and the professional installer Property and equipment are carried at cost. Depreciation is provided throughout Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, on straight-line and accelerated methods over the estimated useful Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, lives of the assets. Service lives for property and equipment generally Oklahoma, Tennessee and Texas. range from three to forty years. Leasehold improvements are amortized Principles of Consolidation over the expected terms of the underlying leases. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, The consolidated financial statements include the accounts of the the cost and accumulated depreciation are eliminated and the gain Company and its wholly owned subsidiaries. All significant intercompany or loss, if any, is included in the determination of net income as balances and transactions have been eliminated in consolidation. a component of other income (expense). The Company reviews Revenue Recognition long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may The Company recognizes sales upon shipment of products. not be fully recoverable. Use of Estimates The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average rates The preparation of the consolidated financial statements, in conformity paid for long-term borrowings. Total interest costs capitalized for with accounting principles generally accepted in the United States the years ended December 31, 2001, 2000 and 1999, were $324,000, (“GAAP”), requires management to make estimates and assumptions $1,354,000 and $1,134,000, respectively. that affect the amounts reported in the consolidated financial state- ments and accompanying notes. Actual results could differ from Income Taxes those estimates. Inventory 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 Inventory, which consists of automotive hard parts, maintenance assets and liabilities are determined based on differences between items, accessories and tools, is stated at the lower of cost or market. financial reporting and tax basis of assets and liabilities, and are Cost has been determined using the last-in, first-out (‘’LIFO’’) method. measured using the enacted tax rates and laws that will be in effect If the first-in, first-out (‘’FIFO’’) method of costing inventory had been when the differences are expected to reverse. used by the Company, inventory would have been $442,529,000 and $369,869,000 as of December 31, 2001 and 2000, respectively. Advertising Costs Amounts Receivable from Vendors expense charged to operations amounted to $12,796,000, $12,150,000 Amounts receivable from vendors consist primarily of amounts due the and $9,428,000 for the years ended December 31, 2001, 2000 and 1999, The Company expenses advertising costs as incurred. Advertising Company for changeover merchandise, rebates and other allowances. respectively. Reserves for uncollectable amounts receivable from vendors are Page 24 Pre-opening Costs accounts payable and long-term debt, as reported in the accompanying Costs associated with the opening of new stores, which consist consolidated balance sheets, approximates fair value. primarily of payroll and occupancy costs, are charged to operations as incurred. Stock Option Plans Reclassifications Certain reclassifications have been made to the 2000 and 1999 consolidated financial statements in order to conform to the The Company has elected to follow Accounting Principles Board 2001 presentation. Opinion No. 25, Accounting for Stock Issued to Employees (‘’APB 25’’), and related interpretations in accounting for its employee stock New Accounting Pronouncements options because, as discussed in Note 11, the alternative fair value In June 2001, the Financial Accounting Standards Board issued accounting provided for under SFAS No. 123, Accounting for Stock- Statement of Financial Accounting Standards No. 142, Goodwill Based Compensation, requires the use of option valuation models and Other Intangible Assets, effective for fiscal years beginning that were not developed for use in valuing employee stock options. after December 15, 2001. Under SFAS 142, goodwill will no longer Under APB 25, because the exercise price of the Company’s stock be amortized but will be subject to annual impairment tests in options equals the market price of the underlying stock on the date accordance with the Statement. Other identifiable intangible assets of grant, no compensation expense is recognized. will continue to be amortized over their useful lives or, if they have Earnings per Share indefinite lives, such identifiable assets will not be amortized but will be subject to annual impairment tests. The Company will apply the Basic earnings per share is based on the weighted-average new rules on accounting for goodwill and other intangible assets outstanding common shares. Diluted earnings per share is based beginning in the first quarter of fiscal year 2002. Application of the on the weighted-average outstanding shares adjusted for the effect provisions of the Statement are not expected to have a material of common stock equivalents. impact on the Company’s financial condition or results of operations. Concentration of Credit Risk NOTE 2—ACQUISITION 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 $1,991,000 and $2,066,000 at December 31, 2001 and 2000, respectively, bears interest at 6% and is due in August 2017. The carrying value of the Company’s financial instruments, including cash, short-term investments, accounts receivable, On October 1, 2001, the Company purchased all of the outstanding stock of Mid-State Automotive Distributors, Inc. (“Mid-State”) for approximately $20.5 million including acquisition costs. Mid-State was a specialty retailer which supplied automotive aftermarket parts throughout certain states in the southeastern part of the United States. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of Mid-State are included in the consolidated statements of income from the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The pro forma effect on earnings of the acquisition of Mid-State are not material. Page 25 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3—SHORT-TERM INVESTMENTS NOTE 6—LONG-TERM DEBT The Company’s short-term investments are classified as available- At December 31, 2001, the Company had available an unsecured for-sale in accordance with SFAS No. 115, Accounting for Certain credit facility providing for maximum borrowings of $140 million. Investments in Debt and Equity Securities, and are carried at cost, The facility is comprised of a revolving credit facility of $125 million which approximates fair market value. At December 31, 2001 and and a term loan of $15 million. At December 31, 2000, the Company 2000, short-term investments consisted of preferred equity securities. had available an unsecured credit facility providing for maximum 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, part- nerships in which certain shareholders of the Company are partners. borrowings of $152.5 million. The facility was comprised of a revolving credit facility of $125 million and a term loan of $27.5 million. At December 31, 2001 and 2000, $61,350,000 and $74,755,000, respectively, of the revolving credit facility and $15 million and $27.5 million, respectively, of the term loan were outstanding. The credit facility, which bears interest at LIBOR plus 0.50% (2.43% at December 31, Generally, these lease agreements provide for renewal options for an 2001), expires in January 2003. additional six years at the option of the Company. Additionally, the Company leases certain land and buildings related to its O’Reilly Auto Parts stores under 15-year operating lease agreements with O’Reilly-Wooten 2000 LLC, which is owned by certain shareholders of the Company. Generally, these lease agreements provide for renewal options for two additional five-year terms at the option of the Company (see Note 7). Rent expense under these operating leases totaled $2,894,000, $2,671,000 and $2,647,000 in 2001, 2000 and 1999, respectively. NOTE 5—NOTE PAYABLE TO BANK At December 31, 2001, the Company had available short-term unsecured bank lines of credit providing for maximum borrowings of $5 million, all of which was outstanding at December 31, 2001. At December 31, 2000, the Company had available unsecured short-term bank lines of credit providing for borrowings up to $10 million, all of which was outstanding at December 31, 2000. The lines of credit bear interest at LIBOR plus 0.50% (2.43% at December 31, 2001). Additionally, at December 31, 2000, the Company had available a short-term line of credit in the amount of $25 million, all of which was outstanding at December 31, 2000. The weighted-average interest rate for all lines of credit for the years ended December 31, 2001 and 2000, was 5.48% and 7.20%, respectively. On May 16, 2001, the Company completed a $100 million private placement of two series of unsecured senior notes (“Senior Notes”). The Series 2001-A Senior Notes were issued for $75 million, are due May 16, 2006, and bear interest at 7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are due May 16, 2008, and bear interest at 7.92% per year. The private placement agreement allows for a total of $200 million of Senior Notes issuable in series. Proceeds from the transaction were used to reduce outstanding borrowings under the Company’s revolving credit facility. During 2001 and 2000, the Company leased certain computer equipment under capitalized leases. The lease agreements are three-year terms expiring from 2001 to 2003. At December 31, 2001, the monthly installments under these agreements were approximately $42,000. The present value of the future minimum lease payments under these agreements totaled $860,000 and $2,232,000 at December 31, 2001 and 2000, respectively, which has been classified as long-term debt in the accompanying consolidated financial statements. During 2001, 2000 and 1999 the Company purchased $467,000, $800,000 and $2,676,000, respectively, of assets under capitalized leases. Additionally, the Company has various unsecured notes payable to individuals and banks, amounting to $251,000 and $97,000, at December 31, 2001 and 2000, respectively. Indirect borrowings under letters of credit provided by a $5,000,000 sublimit of the revolving credit facility totaled $210,650 and $648,510 at December 31, 2001 and 2000, respectively. These letters of credit reduced availability of borrowings at December 31, 2001 and 2000. Page 26 Principal maturities of long-term debt for each of the next five December 31, 2001 and 2000, totaled approximately $43.0 million years ending December 31 are as follows: and $1.0 million, respectively. Future minimum rental commitments (amounts in thousands) 2002 2003 2004 2005 2006 Thereafter $ 11,843 65,510 51 19 75,016 25,022 $177,461 Cash paid by the Company for interest during the years ended December 31, 2001, 2000 and 1999, amounted to $9,092,000, $8,240,000 and $6,134,000, respectively. NOTE 7—COMMITMENTS Lease Commitments under the Facility have been included in the table of future minimum annual rental commitments below. On December 29, 2000, the Company completed a sale-leaseback transaction. Under the terms of the transaction, the Company sold 90 properties, including land, buildings and improvements, for $52.3 million. The lease, which is being accounted for as an operating lease, provides for an initial lease term of 21 years and may be extended for one initial ten-year period and two additional successive periods of five years each. The resulting gain of $4.5 million has been deferred and is being amortized over the initial lease term. Net rent expense during the initial term is approximately $5.5 million annually and is included in the table of future minimum annual rental commitments below. In August, 2001, the Company completed a sale-leaseback with O’Reilly-Wooten 2000 LLC (an entity owned by certain shareholders During 1999, the Company entered into a Master Lease Agreement with of the Company). The transaction closed on September 1, 2001, O’Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of with a purchase price of approximately $5.6 million for nine O’Reilly the Company) related to the sale and leaseback of certain properties. Auto Parts stores and did not result in a material gain or loss. The The transaction closed on January 4, 1999, with a purchase price of lease, which has been accounted for an operating lease, calls for approximately $5.5 million. The lease calls for an initial term of 15 an initial term of 15 years with three five-year renewal options. years with two five-year renewal options. The Company also leases certain office space, retail stores, On December 15, 2000, the Company entered into a $50 million property and equipment under long-term, non-cancelable operating Synthetic Operating Lease Facility (“the Facility”) with a group of leases. Most of these leases include renewal options and some financial institutions. Under the Facility, the Lessor acquires land to include options to purchase and provisions for percentage rent be developed for O’Reilly Auto Parts stores and funds the development based on sales. At December 31, 2001, future minimum rental thereof by the Company as the Construction Agent and Guarantor. payments under all of the Company’s operating leases for each The Company subsequently leases the property from the Lessor for of the next five years and in the aggregate are as follows: an initial term of five years. The Company has the option of requesting up to two additional successive renewal periods of five years each (amounts in thousands) from the lessor, although the lessor is not obligated to grant the Company either renewal period. The Facility provides for a residual value guarantee of $36.6 million and purchase options on the properties. It also contains a provision for an event of default whereby the Lessor, among other things, may require the Company to purchase any or all of the properties. The Company is utilizing the Facility to finance a portion of its store growth. Funding under the Facility at 2002 2003 2004 2005 2006 Thereafter RELATED PARTIES NON-RELATED PARTIES TOTAL $ 2,751 $ 22,087 $ 24,838 1,710 1,684 1,455 1,227 9,786 $ 18,613 19,787 17,896 15,354 12,510 109,856 $197,490 21,497 19,580 16,809 13,737 119,642 $216,103 Page 27 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Rental expense amounted to $25,122,000, $16,219,000 and accrued at December 31, 2001 and 2000, was approved on $14,122,000 for the years ended December 31, 2001, 2000 and October 18, 2001, by the 60th Judicial District Court of Texas. 1999, respectively. Other Commitments In addition, the Company is involved in various other legal proceedings incidental to the conduct of its business. Although the Company cannot ascertain the amount of liability that it may The Company had construction commitments, which totaled incur from any of these matters, it does not currently believe that, approximately $22.3 million, at December 31, 2001. in the aggregate, they will have a material adverse effect on the consolidated financial position, results of operations or cash flows NOTE 8—LEGAL PROCEEDINGS of the Company The Company is a defendant in a lawsuit entitled “Coalition for a Level Playing Field, L.L.C., et. al., v. AutoZone, Inc., et. al.,” in the NOTE 9—EMPLOYEE BENEFIT PLANS United States District Court for the Eastern District of New York. The Company sponsors a contributory profit sharing and savings The over 100 plaintiffs consist primarily of warehouse distributors plan that covers substantially all employees who are 21 years of age and jobbers, and the eight defendants are principally automotive with at least six months of service. Employees may contribute up to aftermarket parts retailers. The plaintiffs allege that the defendants 15% of their annual compensation subject to Internal Revenue Code violated certain provisions of the Robinson-Patman Act by receiving maximum limitations. The Company has agreed to make matching and inducing various forms of price discriminations from manufacturers contributions equal to 50% of the first 2% of each employee’s of automotive parts. The plaintiffs seek compensatory damages, contribution and 25% of the next 4% of each employee’s contribution. as well as injunctive and other equitable relief. The Company and Additional contributions to the plan may be made as determined the other defendants filed a motion to dismiss this action and annually by the Board of Directors. After three years of service, subsequently, on October 23, 2001, the court overruled a substantial Company contributions and earnings thereon vest at the rate of portion of the defendant’s motion. The Company believes the claims 20% per year. Company contributions charged to operations are without merit and that this lawsuit will not have a material amounted to $3,207,000 in 2001, $2,454,000 in 2000 and $2,618,000 adverse effect on the Company’s consolidated financial position, in 1999. Company contributions, in the form of common stock, to results of operations or cash flows. the profit sharing and savings plan to match employee contributions The Company was involved in litigation as a result of a com- during the years ended December 31 were as follows: plaint 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 had purchased a battery from Hi/LO since May 1990. The complaint alleged that Hi/LO offered and sold ‘’old,’’ ‘’used’’ and ‘’out of warranty’’ batteries as if the batteries were new, resulting in claims for violations of deceptive trade practices, breach of contract, negligence, fraud, negligent misrepresentation and breach of warranty. On January 15, 2001, the Company reached a favorable verbal settlement with the plaintiffs’ counsel. The settlement, which was not significant and which was YEAR CONTRIBUTED 2001 2000 1999 SHARES MARKET VALUE 37,081 $969,000 49,891 29,481 724,000 658,000 Page 28 Profit sharing contributions accrued at December 31, 2001, 2000 reserved for future issuance under this plan. The exercise price of and 1999, funded in the next year through the issuance of shares of options granted shall not be less than the fair market value of the the Company’s common stock were as follows: stock on the date of grant, and the options will expire no later than YEAR FUNDED 2001 2000 1999 SHARES MARKET VALUE 88,118 $1,729,000 132,890 1,919,000 60,640 1,300,000 The Company also sponsors a non-funded non-contributory defined benefit health care plan, which provides certain health benefits to retired employees. According to the terms of this plan, retirees’ annual benefits are limited to $1,000 per employee starting at age 66 for employees with 20 or more years of service. Post-retirement benefit costs for each of the years ended December 31, 2001, 2000 and 1999, amounted to $12,000. Additionally, the Company has adopted a stock purchase plan under which 1,000,000 shares of common stock are reserved for future issuance. Under the plan, substantially all employees and non-employee directors have the right to purchase shares of the Company’s common stock monthly at a price equal to 85% of the fair market value of the stock. Under the plan, 97,991 shares were issued at a weighted-average price of $22.13 per share during 2001, 147,315 shares were issued at a weighted-average price of $12.83 per share during 2000, and 78,927 shares were issued at a weighted-average price of $18.90 per share during 1999. The Company has in effect a performance incentive plan for 10 years from the date of grant. Options granted pursuant to the plan become exercisable no sooner than six months from the date of grant. In the case of a shareholder owning more than 10% of the outstanding stock of the Company, the exercise price of an incentive option may not be less than 110% of the fair market value of the stock on the date of grant, and such options will expire no later than 10 years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable for the first time by any individual in any calendar year may not exceed $100,000. A summary of outstanding stock options is as follows: Outstanding at December 31, 1998 Granted Exercised Canceled Forfeitures PRICE PER SHARE $ 5.94 - 22.91 18.44 - 26.75 5.94 - 18.75 6.75 - 26.38 6.07 Outstanding at December 31, 1999 $ 6.07 - 26.75 Granted Exercised Canceled 10.56 - 24.38 6.07 - 22.75 10.00 - 25.88 Outstanding at December 31, 2000 $ 8.00 - 26.75 Granted Exercised Canceled 14.37 - 37.62 8.15 - 26.37 14.25 - 34.30 NUMBER OF SHARES 3,183,850 1,148,000 (948,620) (35,750) (1,000) 3,346,480 581,250 (361,875) (206,625) 3,359,230 1,328,000 (1,082,695) (220,787) 3,383,748 the Company’s senior management under which 400,000 shares of Outstanding at December 31, 2001 $ 8.00 - 37.62 restricted stock are reserved for future issuance. Under the plan, no shares were issued to senior management in 2001. In 2000 Options to purchase 1,250,261, 1,729,033 and 1,171,888 shares and 1999, 12,164 shares and 6,796 shares were issued under the of common stock were exercisable at December 31, 2001, 2000 and plan, respectively. 1999, respectively. NOTE 10—STOCK OPTION PLANS The Company has a stock option plan under which incentive stock options or non-qualified stock options may be granted to officers and key employees. An aggregate of 6,000,000 shares of common stock is The Company also maintains a stock option plan for non- employee directors of the Company under which 300,000 shares of common stock are reserved for future issuance. All director stock options are granted at fair market value on the date of grant and expire on the earlier of termination of service to the Company as Page 29 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) a director or seven years. Options granted under this plan become 2000 and 1999, were $16.52, $9.24 and $10.22, respectively. The exercisable six months from the date of grant. A summary of out- weighted-average remaining contractual life at December 31, 2001, standing stock options is as follows: for all outstanding options under the Company’s stock option plans is PRICE PER SHARE NUMBER OF SHARES Outstanding at December 31, 1998 $ 6.56 - 13.50 Granted Exercised Canceled 23.91 – – Outstanding at December 31, 1999 $ 6.56 - 23.91 Granted Exercised Canceled 12.44 6.56 - 6.75 – Outstanding at December 31, 2000 $ 9.09 - 23.91 Granted Exercised Canceled 20.65 9.09 - 23.91 – Outstanding at December 31, 2001 $12.44 -23.91 70,000 20,000 – – 90,000 20,000 (20,000) – 90,000 30,000 (70,000) – 50,000 All options under this plan were exercisable at December 31, 2001, 2000 and 1999. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the 7.346 years. The weighted-average exercise price for all outstanding options under the Company’s stock option plans was $20.63, $16.12 and $16.15 at December 31, 2001, 2000 and 1999, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows: Company had accounted for its employee and non-employee director (In thousands, except per share data) 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 2001, 2000 and 1999, respectively: risk-free interest rates of 5.16%, 5.02% and 6.54%; volatility factors of the expected market price of the Company’s common stock of .475, .442 and .247; and weighted-average expected life of the options of 9, 8.9 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, 2001, 2001 2000 1999 Pro forma net income $60,946 $48,177 $43,501 Pro forma basic net income per share Pro forma net income per share – assuming dilution $ $ 1.17 $ 0.94 $ 0.89 1.15 $ 0.93 $ 0.88 Page 30 NOTE 11—INCOME PER COMMON SHARE NOTE 12—INCOME TAXES The following table sets forth the computation of basic and diluted Deferred income taxes reflect the net tax effects of temporary income per common share: (In thousands, except per share data) YEARS ENDED DECEMBER 31, 2001 2000 1999 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: $66,352 $51,708 $45,639 (In thousands) 2001 2000 Numerator (basic and diluted): Net income Denominator: Denominator for basic income per common share – weighted- average shares Effect of stock options (Note 10) 52,121 665 51,168 560 48,674 1,041 Denominator for diluted income per common share – Adjusted weighted- average shares and assumed conversion Basic net income per common share Net income per common share – assuming dilution $ $ 52,786 51,728 49,715 1.27 $ 1.01 $ 0.94 1.26 $ 1.00 $ 0.92 Deferred tax assets: Current: Allowance for doubtful accounts $ 665 $ 51 Other accruals Noncurrent: Other Total deferred tax assets Deferred tax liabilities: Current: 4,284 4,949 – 4,949 2,960 3,011 834 3,845 Inventory carrying value 1,041 1,609 Noncurrent: Property and equipment Other Total deferred tax liabilities Net deferred tax liabilities 8,333 808 10,182 4,920 – 6,529 $ 5,233 $ 2,684 Page 31 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12—INCOME TAXES (CONTINUED) NOTE 13—STOCK SPLIT The provision for income taxes consists of the following: On November 8, 1999, the Company’s Board of Directors declared (In thousands) 2001: Federal State 2000: Federal State 1999: Federal State CURRENT DEFERRED TOTAL $30,429 3,575 $5,702 $36,131 669 4,244 $34,004 $6,371 $40,375 $25,120 3,086 $2,946 $28,066 299 3,385 a two-for-one stock split which was effected in the form of a 100% stock dividend payable to all shareholders of record as of November 15, 1999. The stock dividend was paid on November 30, 1999. Accordingly, this stock split has been recognized by reclassifying $254,000, the par value of the additional shares resulting from the split, from retained earnings to common stock. All share and per share information included in the accompanying consolidated financial statements has been restated to reflect the $ 28,206 $ 3,245 $ 31,451 retroactive effect of the stock split for all periods presented. $19,934 1,996 $4,959 $24,893 496 2,492 $ 21,930 $ 5,455 $ 27,385 NOTE 14—PUBLIC OFFERING OF COMMON STOCK In March 1999, the Company completed a secondary public offering of 7,002,000 shares of common stock. Pursuant to this offering, the Company issued 7,002,000 shares of common stock resulting in net proceeds to the Company of $124,570,000. A portion of the proceeds was used to repay the Company’s outstanding indebtedness under its bank credit facilities. The remaining portion of the proceeds was A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows: (In thousands) 2001 2000 1999 used to fund the Company’s expansion. Federal income taxes at statutory rate $37,354 $29,106 $25,558 State income taxes, net of federal tax benefit Other items, net 2,775 246 2,200 145 1,625 202 $40,375 $ 31,451 $ 27,385 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, 2001, 2000 and 1999, cash paid by the Company for income taxes amounted to $28,676,000, $24,244,000 and $17,151,000, respectively. Page 32 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, 2001, and 2000, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of O’Reilly Automotive, Inc. and Subsidiaries at December 31, 2001, and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Kansas City, Missouri February 22, 2002 Page 33 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T DIRECTORS AND EXECUTIVE COMMITTEE Chub O’Reilly Chairman of the Board Emeritus and Director Advisory Board The Wine Discount Center (Director 1993-July 1997; Feb. 2001) Alan Fears Vice President of Expansion and Acquisitions Charlie O’Reilly Vice Chairman of the Board and Director Jay Burchfield (1)(2) Director Tricia Headley Vice President of Corporate Services and Director and Chairman of the Board Trust Corporate Secretary David O’Reilly (1) Co-Chairman of the Board and Chief Executive Officer and Director Larry O’Reilly Co-Chairman of the Board and Chief Operating Officer and Director Rosalie O’Reilly-Wooten Executive Vice President and Director Ted Wise President of Sales, Operations and Real Estate Company of the Ozarks Director Quest Capital Alliance Director Primary Care Network Director and Chairman of the Board City Bancorp (Director since 1997) Joe C. Greene (1)(2) Director Director of Bass Pro, Inc. Director of Coca Cola Bottling Co. Director of Commerce Bank Greg Henslee President of Merchandise, Systems and Distribution Chairman of Missouri Sports Hall of Fame Executive Secretary of Missouri Golf Association Paul Lederer (1)(2) Director Director R & B, Inc. Director FPM, Inc. Director Icarz.com Director Trans-Pro, Inc. Advisory Board Richco, Inc. Advisory Board Turtle Wax, Inc. Advisory Board Ampere Products OPERATIONS MANAGEMENT SENIOR MANAGEMENT Managing Partner of Greene & Curtis, LLP, attorneys (Director since 1993) Jim Batten Vice President of Finance Chief Financial Officer Ron Byerly Vice President of Marketing, Advertising and Training Pat O’Reilly Vice President of Distribution Steve Pope Vice President of Human Resources Jeff Shaw Vice President of Southern Division Jerry Skaggs Vice President of Sales Mike Swearengin Vice President of Merchandise Mike Williams Vice President of Information Systems (1) Member of Audit Committee (2) Member of Compensation Committee Allen Alexander Director of Iowa/Nebraska Region Mike Chapman Director of Region 9 Jack House Director of Customer Services Steve Rice Director of Credit and Collections Buddy Ball Director of Kansas City Region Keith Childers Director of Little Rock Region Randy Johnson Director of Inventory Control Tony Bartholomew Director of Southern Division Sales Ken Cope Director of Nashville Region Brad Knight Director of Pricing Greg Beck Director of Purchasing Bert Bentley Director of Houston Region Doug Bragg Director of Oklahoma Region Michelle Bright Director of Finance Mary Brown Director of Human Resourses Charlie Downs Director of Store Expansion Phyllis Evans Director of Store Administration John Grassham Director of Dallas Region Joe Hankins Director of Store Design Jaime Hinojosa Director of Valley Region Kenny Martin Director of Gulf States Jim Maynard Director of Employee and Team Member Relations David McCready Director of DC Operations Kim Mesenbrink Director of Accounting Wayne Price Director of Risk Management Barry Sabor Director of Loss Prevention Denny Smith Director of Springfield Region Dick Smith Director of Construction and Real Estate Charlie Stallcup Director of Training David Strom Director of Houston Region Danny Woods Director of Installer Marketing Page 34 OPERATIONS MANAGEMENT (CONTINUED) CORPORATE MANAGEMENT Tom Allen Computer Operations Manager Becky Fincher Advertising Manager Dan Altis Distribution Center Projects and Procedures Manager Keith Asby Sales Manager of Special Markets Jeanene Asher Telecommunications Manager Mike Ballard Internet Development Manager Bob Bealert Regional Distribution Center Manager Doug Bennett Sales Department Manager Steve Berger Safety Manager Ron Biegay Southern Division Training Manager Larry Blundell Regional Field Sales Manager Rob Bodenhamer Database Development Manager Larry Boevers Regional Distribution Center Manager Tom Bollinger Regional Field Sales Manager Bridget Brashears PC Support Manager Kent Brewer Distribution Center Transportation Manager John Bush Regional Field Sales Manager Yvonne Cannon Payroll Manager Julie Carroll Des Moines Distribution Center Manager Tom Connor Springfield Distribution Center Manager Cecil Davis Distribution Center Inbound Manager Joe Edwards Store Installations Manager Paula Eyman Accounting Special Projects Manager DISTRICT CORPORATE MANAGEMENT Eddie Allen Chuck Avis Emmitt Barina Brince Beasley Steve Beil Brad Beckham Tim Brakebill Patrick Brown Jay Burroughs Jimmy Carter David Chavis Dirk Chester Ken Coda Kenny Criss Bruce Dowell Dan Dowell Tommy Dunn Dallas Engel Ron England Tony Fagan Bill Fellows Kirk Frazier Mark Frazier Kyle Gorzik Terry Grimmett Jon Haught Kevin Ford Regional Distribution Center Manager Mike Ford Sales Territory Manager Randy Freund Springfield Regional Sales Manager David Furr Service Equipment Sales Manager Curtis Johnson Nashville Distribution Center Manager Gene Johnson Real Estate Property Manager Greg Johnson Systems Development Manager Joyce Schultz Houston Office Manager Tom Seboldt Senior Product Manager Bill Seiber Knoxville Distribution Center Manager David Jordan Kansas City Distribution Center Manager Darren Shaw Product Manager Les Keeth Supplier Credit Manager Art Glidewell Oklahoma City Distribution Center Manager Steve Lines Sales Training Manager David Glore Ozark Sales Manager Garry Glossip Store Accounting Manager Jeff Main Jobber Systems Sales Manager Ed Martinez Houston Distribution Center Manager Keith Slemp Regional Sales Manager Tim Smith Credit Manager Dwayne Snow Regional Sales Manager Paul Stinson Regional Sales Manager Larry Gregory Real Estate Store Maintenance Manager Jeff McKinney Customer Satisfaction Manager Mary Stratton Human Resources Records Manager Kevin Greven Retail Marketing and Promotions Manager Bryan Mescher Regional Sales Manager David Hardin Little Rock Distribution Center Manager Chapman Norman Inventory Maintenance Manager Mike Hauk Division Training Manager Brett Heintz Store Procedures Manager Doy Hensley Help Support Manager Julie Hibler Corporate Services Manager Brad Oplotnik Systems and Network Manager Steve Peterie Construction Design Manager Steve Phillips Division Loss Prevention Manager Kathy Prainito Real Estate Contract Administrator Manager Diana Hicks Internal Communications Manager Ed Randall Houston Distribution Center Manager Mark Hoehne Regional Sales Manager Lori Holden Customer Service Manager Doug Hopkins Distribution Systems Manager Shari Reaves Benefits Manager Jeanetta Redden Dallas Distribution Center Manager Art Rodriguez Regional Sales Manager Vicki Hume Corporate Administration Travel Manager Chuck Rogers Installer Systems Manager Doug Hutchison Inventory Project Manager Steve Jasinski Systems Development Manager Mary Sabor Distribution Center Administrative Services Manager Rick Samsel Inventory Control Manager Cliff Tomerlin Regional Sales Manager Tom Tunnell Financial Reporting and Budgeting Manager Rob Verch Product Manager Tamra Waitman Assistant Controller Patton Walden Division Training Manager Jeff Watts Regional Sales Manager Larry Wiles A/V Communications Manager Saundra Wilkinson Store Support Manager Joe Winterberg Product Manager Wes Wise Installer Marketing Manager Nicki Woods Operations/Loss Prevention Administrative Manager Rick Hedges Gerry Hendrix Perry Hess Brad Hilker Mike Hollis David House Jeff Howard Jeff Jennings Chad Keel Butch Kelton Todd Kemper Jim Koehn Scott Kraus John Krebs Scott Leonhart David Lever Chris Lewis Rodger McClary Kevin McCurry Marc McGehee Wayne McKinney Travis McPherson Chris Meade Curt Miles Ciro Moya Kenny Omland Kevin Overmon Ron Papay Jude Patterson Pernell Peters David Pilat Mike Platt Will Reger Alan Riddle Tommy Rhoads Larry Roof John Rosati Juan Salinas Jim Scott Brad Seaborn Cliff Sedtal Steve Severe Mark Smith Brian Stecklein Marvin Swaim Bert Tamez Randy Tanner Mike Tatum Rick Tearney Greg Thomas Dallas Thompson Justin Tracy Mark Van Hoecke Brett Warstler Rob Weiskirch John Wells Allen Wise Dexter Woods Mike Yates Jason York Page 35 A M O D E L Y E A R O ’ R E I L L Y A U T O M O T I V E 2 0 0 1 A N N U A L R E P O R T SHAREHOLDER INFORMATION CORPORATE ADDRESS 233 South Patterson Springfield, Missouri 65802 417/862-3333 TRADING SYMBOL The Company’s common stock is traded on The Nasdaq Stock Market (National Market) under the symbol ORLY. Web site – www.oreillyauto.com NUMBER OF SHAREHOLDERS REGISTRAR AND TRANSFER AGENT UMB Bank 928 Grand Boulevard Kansas City, Missouri 64141-0064 As of February 28, 2002, O’Reilly Automotive, Inc. had approximately 20,224 shareholders based on the number of holders of record and an estimate of the number of individual participants represented by security position listings. Inquiries regarding stock transfers, lost certificates or address ANALYST COVERAGE changes should be directed to UMB Bank at the above address. The following analysts provide research coverage of O’Reilly INDEPENDENT AUDITORS Ernst & Young LLP One Kansas City Place Kansas City, Missouri 64105-2143 LEGAL COUNSEL Gallop Johnson & Neuman, L.C. 101 South Hanley Road, Suite 1600 St. Louis, Missouri 63105 Skadden, Arps, Slate, Meagher & Flom 333 West Wacker Drive, Suite 2100 Chicago, Illinois 60606 Automotive, Inc. William Blair & Co. – Mark Miller Merrill Lynch – Douglas Neviera Advest – Brett Jordan Huntleigh Securities – John Rast Salomon Smith Barney – Bill Julian Credit Suisse First Boston – Gary Balter MARKET PRICES AND DIVIDEND INFORMATION The prices in the table below represent the high and low sales price for O’Reilly Automotive, Inc. common stock as reported by The Nasdaq Stock Market. The common stock began trading on April 22, 1993. No cash dividends have been declared since 1992, and the Company does not anticipate paying any cash dividends in the foreseeable future. ANNUAL MEETING The annual meeting of shareholders of O’Reilly Automotive, Inc. will be held at 10:00 a.m. local time on May 7, 2002, at the University Plaza Convention Center, 333 John Q. Hammons Parkway in Springfield, Missouri. Shareholders of record as of February 28, 2002, will be entitled to vote at this meeting. First Quarter Second Quarter Third Quarter Fourth Quarter For the Year 2001 2000 HIGH LOW HIGH LOW $ 273/16 $ 151/2 $ 221/8 $ 81/4 297/16 359/16 3811/25 3811/25 183/4 223/5 27 151/2 157/16 161/8 271/4 271/4 113/4 131/8 14 81/4 FORM 10-K REPORT The Form 10-K Report of O’Reilly Automotive, Inc. filed with the Securities and Exchange Commission and our quarterly press releases are available without charge to shareholders upon written request. These requests and other investor contacts should be directed to James R. Batten, Vice President of Finance/Chief Financial Officer, at the corporate address. Page 36 MISSION STATEMENT “O’Reilly Automotive will be the dominant supplier of auto parts in our market areas by offering our retail customers, professional installers and jobbers the best combination of inventory, price, quality and service; providing our team members with competitive wages and benefits, and working conditions which promote high achievement and ensure fair and equitable treatment; and, providing our stockholders with an excellent return on their investment.” Certain statements contained in this press release are forward-looking statements. These statements discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described in these forward-looking statements. Please refer to the Risk Factors sections of the Company’s Form 10-K for the year ended December 31, 2001, for more details. O M , s i u o L . t S , e v i t a e r C n o s i r r a H k a F l : i n g s e D 233 South Patterson Springfield, Missouri 65802 417-862-3333 www.oreillyauto.com