O’Reilly Automotive
Annual Report 2000

Plain-text annual report

10769_Covers 3/29/01 9:32 AM Page 1 O ’ R E I L L Y A U T O M O T I V E 2 0 0 0 A N N U A L R E P O R T O ’ R E I L L Y A U T O M O T I V E | 2 0 0 0 A N N U A L R E P O R T | D R I V E N 233 South Patterson Springfield, Missouri 65802 417-862-3333 www.oreillyauto.com 10769_Covers 3/29/01 9:32 AM Page 2 O ’ R E I L L Y A U T O M O T I V E 2 0 0 0 A N N U A L R E P O R T F I N A N C I A L H I G H L I G H T S (In thousands, except per share and operating data) Years ended December 31, 2000 1999 Percent Change Operations Product sales Operating income Net income Financial position Working capital Total assets Long-term debt Shareholders’ equity Net income per common share (diluted) Weighted average common $ 890,421 $ 754,122 90,029 51,708 76,920 45,639 $ 296,272 $ 249,351 715,995 90,463 463,731 610,442 90,704 403,044 18.1% 17.0% 13.3% 18.8% 17.3% – 15.1% $ 1.00 $ 0.92 8.7% shares outstanding (assuming dilution) 51,728 49,715 4.0% Operating data Stores at year end Same-store sales gain 672 4.0% 571 9.6% 17.7% -5.6% T A B L E O F C O N T E N T S O’Reilly Leadership – Charged . . . . . . . . . . . .page 4–5 Team O’Reilly – Revved . . . . . . . . . . . . . . . . .page 6–7 Dual Market Strategy – Fueled . . . . . . . . . . .page 8–9 Distribution – Geared . . . . . . . . . . . . . . . . . . .page 10–11 Financial Information Selected Consolidated Financial Data . . . . . . . .page 13 Management’s Discussion and Analysis . . . . . .page 15 Consolidated Financial Statements . . . . . . . . . .page 20 Notes to Consolidated Financial Statements . . .page 24 Report of Independent Auditors . . . . . . . . . . . .page 33 Directors and Management . . . . . . . . . . . . . . .page 34 Shareholder Information . . . . . . . . . . . . . . . . .page 36 Certain statements contained in this document are forward-looking statements. the economy in general, inflation, consumer debt levels, governmental approvals, our These statements discuss, among other things, expected growth, store development ability to hire and retain qualified employees and the weather. Actual results may and expansion strategy, business strategies, future revenues and future performance. materially differ from anticipated results described in these forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, Please refer to the Risk Factors sections of the Company’s Form 10-K for the year including, but not limited to, competition, product demand, the market for auto parts, ended December 31, 2000, for more details. 2 0 0 0 Y E A R I N R E V I E W January Announced acquisition of Gateway Auto Parts – 14 stores (12 net) in Dallas/Fort Worth, Texas February Announced entry into E-Commerce, selling parts at www.oreillyauto.com April Announced purchase of 14 (9 net) KarPro stores in Arkansas and distribution center (“DC”) in Little Rock, Arkansas August Announced formation of Internet Autoparts, Inc. December Opened 672nd store (101 for the year 2000), and opened Dallas Distribution Center Growth seems to be the word that best explains O’Reilly in the year 2000. We opened 101 new stores and added our sixth and seventh DCs. We added the opportunity for our customers to purchase automotive parts and accessories via their home computers and the Internet. We ended the year with 1,300 additional team members, which means there are nearly 11,000 people working in our stores, DCs and corporate offices. O’Reilly Auto Parts truly is DRIVEN! 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 ) Our 10-year compound average growth rate in earnings per share is 26%. 1999 $ .92 2000 $ 1.00 $ 1.00 1998 $ .71 $ .80 $ 1.20 $ .60 Earnings Per Share 1997 $ .54 1996 $ .45 1995 $ .39 $ .40 $ .00 $ .20 N U M B E R O F S T O R E S Our growth plans include opening 18%-20% new stores each year 2000 672 1999 571 1998 491 1000 800 1200 600 Number of Stores 400 0 200 1997 259 1996 219 1995 188 T H E H I S T O R Y O F O ’ R E I L L Y A U T O M O T I V E 1957 C.F. & Chub O’Reilly open O’Reilly Automotive with 10 additional employees. 1958 First-Year Sales: $700,000. 1961 Sales: $1.3 million. 1 2000 AR O ’ R E I L L Y S H A R E H O L D E R S 2 0 0 0 A N N U A L R E P O R T To o u r s h a re h o l d e r s : Team O’Reilly worked extremely hard to stores by early 2001. This will allow us to of technological advances in systems and make 2000 another very successful year. We continue expanding our stores in northern programs will allow us to greatly improve added 101 new stores, 43 through various Texas, both to the east and west. Also customer service with more value added to acquisitions, including 12 Gateway Auto included in the KarPro purchase was a the O’Reilly shopping experience. Included in Parts stores in Dallas/Ft. Worth, Texas, and 97,000 square-foot DC which will provide these efforts are: an electronic transaction nine KarPro stores in Little Rock, Arkansas. quicker access and more product coverage database, which allows easier and better On the distribution front, we also had a to our stores in Arkansas and will allow access to customer purchase history; very eventful year. The 338,140 square-foot significant expansion in those markets. improved product search capability to allow distribution center (“DC”) in Dallas, Texas, Our team members were very focused stores to locate other O’Reilly stores and DCs which was purchased a year ago, opened on many projects designed to enhance the that carry harder-to-find items; and a new in December and will service over 100 level of service to our customers. A number store inventory management system that 2 2000 AR Left to right: Larry O’Reilly, Ted F. Wise, Rosalie O’Reilly-Wooten, Charlie O’Reilly, David O’Reilly and Greg Henslee. 1963 Charles H. “Charlie” O’Reilly, Jr. joins the Company. 1965 Second O’Reilly Auto Parts store opened. 1967 Sales: $2.2 million. allows more specific inventory customization margin in excess of 10% in 2000, and distribution throughout the upcoming year. focusing on improving turnover and return have set our goal at 11% for 2001. This is Many new enhancements to our store on investment for our shareholders. Con- aggressive but attainable if we collectively displays and merchandising plans will sequently, the list of improvements completed execute our plan. With over 11,000 O’Reilly continue to make O’Reilly a leading-edge in 2000 and those rolling out in 2001 is team members, we have placed a priority on shopping experience. We will, as always, extensive, but one improvement that is very developing them, knowing that to function focus our efforts on the commercial or significant is the establishment of a Company at our highest level, we must acknowledge professional service technician segment, Intranet. This will have a huge impact on our the tremendous value that each and every which requires a very experienced and productivity, allowing our stores to operate individual brings to our effort. We truly informed staff in our stores. Our plan is to nearly paperless by utilizing various electronic embrace the philosophy that a “happy stay tuned to our “dual market strategy,” forms and reports. Immediate access to a team” will make for satisfied customers. with approximately 50% of our sales to wealth of information through the Intranet Our plans for 2001 include continued the professional installer and 50% to the will allow the stores to carry out their growth, combining approximately 120 new do-it-yourself (“DIY”) or retail trade. We responsibilities much more efficiently, thereby store installations with existing progress feel this combination of business is right allowing our managers and team members toward increased same-store sales growth for O’Reilly and allows us to differentiate to focus more on customer service. in the mid single-digit level. With these two ourselves in product offering, professional With product sales of $890 million in concepts, we hope to grow our top-line service to our customers and knowledgeable 2000, we are anxiously pursuing our goal revenues by 18% or more and our operating team members who are DRIVEN to succeed. of over $1 billion in revenue in 2001. Our profits by more than that with increased In conclusion, we believe 2001 will be an commitment to our shareholders is focused efficiencies in our operations. No additional excellent year with many challenges. more than ever on operating efficiently DCs will be needed in 2001 to accomplish We are very prepared to meet the high and, therefore, at better operating margins. these objectives; therefore, we fully plan expectations our shareholders have grown We are very proud of achieving an operating to leverage our existing investment in to expect from Team O’Reilly. Larry O’Reilly Chief Operating Officer & Co-Chairman of the Board Ted F. Wise Co-President Rosalie O’Reilly-Wooten Executive Vice President Charlie O’Reilly Vice Chairman of the Board David O’Reilly Chief Operating Officer & Co-Chairman of the Board Greg Henslee Co-President 3 2000 AR O ’ R E I L L Y L E A D E R S H I P 2 0 0 0 A N N U A L R E P O R T Charged Charged Charged Training new team members. Planning new store locations. Researching new products. Our Management is CHARGED with that earn the trust and respect of fellow Pooling the resourcefulness and creativity the excitement of growth! team members, our customers and our of our 40 senior management leaders who Successfully leading a growing company shareholders. O’Reilly management meets average more than 18 years of service is a daunting challenge – one that requires this challenge head-on with contagious with O’Reilly, we are confident that we skilled, innovative, experienced and visionary enthusiasm and determination. will attain the goals we’ve set. Installing leaders. They are everyday people with The O’Reilly family’s belief in and vision warehouse and store systems for managing extraordinary dedication and knowledge for the Company are passed down through and improving our inventory turns, while the ranks from the strategic planning still providing the broadbase of parts our meetings to the Annual Managers’ customers have come to rely on, and wisely Conference that is attended by more than using our balance sheet and obtaining 1,000 store, district and sales managers. capital with sale-leaseback and synthetic- Charlie O’Reilly personally attends many lease transactions, are a few ways to arrive store grand openings – extending the at our targets of 11% operating margin, “family” welcome to new team members reducing SG&A to 32%-32.5% of sales and and demonstrating firsthand the O’Reilly increasing our EPS by 22%-25% in 2001. Culture! He’ll have many more At O’Reilly … We’re looking back opportunities with our plans to open on a proud past and looking ahead 120 new stores in 2001. to a great future! 4 2000 AR Charged 1969 1970 Larry O’Reilly joins the Company. Fifth O’Reilly Auto Parts store opened. 1972 David O’Reilly joins the Company. All O’Reilly supervisors, including store managers, understand that the best way to spread the Company’s vision and values is by displaying these through one-on- one contact with other team members. Neat, well-stocked stores and friendly, knowledgeable Professional Parts People keep our customers coming back to O’Reilly for all their parts and tool needs. 1975 1977 Groundbreaking for new warehouse facility. Sales: $7.0 million. 15th O’Reilly Auto Parts store opened. T E A M O ’ R E I L L Y 2 0 0 0 A N N U A L R E P O R T Respect, honesty, teamwork, expense control, hard work, professionalism, enthusiasm, excellent customer service, dedication, win-win attitude. These 10 values are prominently to fulfilling their responsibilities to fellow displayed throughout the Company team members and our customers. on posters and, more importantly, Whether at stores, distribution centers in our REVVED team members! or in corporate office support positions, Successfully offering inspiration, motivation everyone understands the need to step The well-defined expectations for team and opportunity are ways O’Reilly fosters outside his or her designated role to give members and the Company’s future goals that old-fashioned family atmosphere help to anyone who needs it. This may offer endless opportunities for anyone among our nearly 11,000 team members. mean staying late, coming in early or willing to work hard. There are countless The day-to-day attitudes passed down by simply answering a phone that’s ringing. examples of current team members who the O’Reilly family since 1957 have bred a The success of O’Reilly depends on started with the Company at counter sales, fierce sense of pride throughout all levels everyone seeing the big picture. delivery or picking orders in a distribution of the Company, and continue to be We’re never disappointed and always center and have, with determination and instilled through weekly newsletters, the inspired to see how O’Reilly pride comes self-improvement, worked their way through monthly “Team Spirit” publication and through whenever our customers, commu- the ranks to corporate management and training and development meetings. nities or fellow team members have a need. even to president of the Company! Team members are empowered to “do We receive dozens of letters each and every At O’Reilly … We take pride in our whatever it takes” and the Company is month praising the many team members who team members, customer service, rewarded by the loyalty of people dedicated have gone above and beyond the call of duty. work ethic and performance. Revved Revved Revved 7 2000 AR D U A L M A R K E T S T R A T E G Y 2 0 0 0 A N N U A L R E P O R T FueledFueled Fueled Giving superior service. Giving extensive product selection. Giving competitive pricing. Our Unique Dual Market Strategy is Now in our 44th year of operation, we dedicated solely to calling upon and selling FUELED to service do-it-yourself and began selling to professional installers in to professional installer customers, we professional installer customers! 1957. From the mid-1960s to the mid-1970s believe we will increase the former Hi-Lo Successfully balancing the complex needs of both DIY and professional installer customers isn’t easy, as many of our competitors have discovered. With eight consecutive years of record revenues and earnings for our shareholders, we may have made it look simple, but there is a lot of history behind our accomplishments. we grew from one store to 15 stores, slowly stores’ sales to the O’Reilly pre-acquisition learning the strategies needed to serve DIY level of approximately 50/50 DIY and customers while continuing to develop professional installer customers. professional installer business. In 1986, But why do we put so much emphasis on we entered the large metropolitan markets. serving a dual market? We believe targeting From the mid-1980s through 1997 we both types of customers allows us to operate derived approximately 50% of our product profitably in both large markets and less sales from our DIY customers and approxi- densely populated geographic areas which mately 50% from our professional installer typically attract fewer competitors. This customers. With the 1998 acquisition of strategy also enables us to target a larger Hi-Lo Automotive, Inc. (189 stores, with base of consumers of automotive aftermarket approximately 65% of sales from DIY parts and capitalize on our existing retail and customers and approximately 35% from distribution infrastructure. It enhances service professional installer customers) our levels to our DIY customers by offering a traditional 50/50 blend of business broad selection of stock keeping units changed. For 2000, approximately 57% (“SKUs”) and the extensive product of sales were from DIY customers and knowledge required by professional installers. approximately 43% from professional The bottom line is that the dual market installer customers. As a result of our strategy – as executed by O’Reilly – is historical success in executing our highly effective. dual market strategy and more than At O’Reilly … Our No. 1 priority 100 full-time sales representatives is customer satisfaction. 8 2000 AR 1982 1980 First Managers’ Conference held. Springfield warehouse expanded by 50%. Rosalie O’Reilly-Wooten joins the Company New 10,000-square-foot office facility at Springfield warehouse site. 1984 Sales: $45 million. Ted Wise (current president) promoted to vice president. 50th store opened in June. 1989 100th O’Reilly Auto Parts store opened. Deliveries to professional installer customers are made throughout the day when orders are placed by phone or via computers we’ve installed at the customer’s business. Fueled Modern technology, such as the rotating carousels shown above, adds efficiency in filling orders and speeding the parts on the way for nightly delivery to O’Reilly stores. 1993 O’Reilly goes public (IPO). Kansas City DC opened. Ranked among 200 best small companies in the U.S. by Forbes Magazine. 1995 1998 1999 2000 Oklahoma City DC opened. O’Reilly purchases Hi/Lo Auto Parts. 500th store opened. Dallas DC opened. Two-for-one stock split. Little Rock DC opened. Secondary stock offering. D I S T R I B U T I O N N E T W O R K 2 0 0 0 A N N U A L R E P O R T Serving more stores. Stocking more products. Driving more vehicles. Our Distribution System is GEARED has given us the power to support overnight for the job! delivery to each of the 792 stores we plan Successfully providing the availability of a to have in operation by the end of 2001 broad range of products is a key competitive and take us well into 2002. Product shipment both our professional installer and DIY advantage in satisfying customer demand is expedited by the state-of-the-art rotating customers expect the parts they order to and generating repeat business. This is carousels in the Des Moines, Iowa, DC, the be delivered as promised, no excuses. precisely why we are dedicated to the unique computerized Warehouse Management Making the whole operation work involves philosophy of providing each of our stores System that should be fully implemented more than 1,900 DC team members – dock with same-day or overnight access to over in four DCs by second quarter 2001 and workers, order pickers, quality control, route 100,000 stock keeping units (“SKUs”), computer-assisted and satellite-based links drivers, shipping supervisors and managers many of which are hard-to-find items not from stores to DCs. With more than $890 – all working together. Customers also rely typically found at other parts retailers. million in product sales in 2000, and with on our fleet of over 100 trucks that averages The opening of our sixth and seventh a goal of over $1 billion for 2001, it will nearly 752,000 miles per month to deliver DCs in Little Rock, Arkansas, and Dallas, take more than computers and carousels products from our DCs to O’Reilly stores. Texas, during the fourth quarter of 2000 to meet customer demand. We know that At O’Reilly … You want it? We’ve got it! Geared Geared Geared 11 2000 AR O ’ R E I L L Y L O C A T I O N S 2 0 0 0 A N N U A L R E P O R T NE IA Des Moines IL KS Kansas City MO OK Oklahoma City Springfield AR Little Rock Dallas TX LA Houston K E Y ( a s o f M a rc h 1 , 2 0 0 1 ) Stars indicate the location of When the year 2000 came to a close, the distribution centers. map showed 672 O’Reilly stores and seven Arkansas . . . . . . . . . . . . . . . . 36 Stores distribution centers (“DCs”). We opened an Illinois . . . . . . . . . . . . . . . . . . . 3 Stores additional 24 stores during the first two Iowa . . . . . . . . . . . . . . . . . . . 57 Stores months of 2001, bringing the total to 696 at Kansas . . . . . . . . . . . . . . . . . . 51 Stores March 1, 2001. By the close of 2001, we plan Louisiana . . . . . . . . . . . . . . . . 30 Stores to open a total of 120 stores. We will continue Missouri . . . . . . . . . . . . . . . . 117 Stores the successful O’Reilly strategy of expanding Nebraska . . . . . . . . . . . . . . . . 24 Stores into new, contiguous markets, keeping all Oklahoma . . . . . . . . . . . . . . . 96 Stores stores within a 150-mile to 200-mile radius Texas . . . . . . . . . . . . . . . . . . 282 Stores of an O’Reilly DC for easy nightly deliveries. 12 2000 AR S E L E C T E D C O N S O L I D A T E D F I N A N C I A L D A T A O ’ R E I L L Y A U T O M O T I V E Years ended December 31, (In thousands, except per share data) INCOME STATEMENT DATA: Product sales Cost of goods sold, including warehouse and distribution expenses Gross profit 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 Income from continuing operations Income (loss) from 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 $890,421 $ 754,122 $ 616,302 $ 316,399 $ 259,243 $ 201,492 $ 167,057 $ 137,164 $110,147 $ 94,937 507,720 428,832 382,701 325,290 358,439 257,863 181,789 134,610 150,772 108,471 116,768 84,724 97,758 69,299 82,102 55,062 65,066 56,255 45,081 38,682 292,672 248,370 76,920 (3,896) 27,385 90,029 (6,870) 31,451 200,962 56,901 (6,958) 19,171 97,526 37,084 472 14,413 79,620 28,851 1,182 11,062 62,687 22,037 236 8,182 52,142 17,157 376 6,461 42,492 12,570 216 4,556 35,204 29,961 8,721 (104) 3,167 9,877 204 3,686 51,708 45,639 30,772 23,143 18,971 14,091 11,072 8,230 6,395 5,450 – – – – – – – – (163) – 51,708 45,639 30,772 23,143 18,971 14,091 11,072 8,230 6,232 5,450 discontinued operations – – – – – – – Net income $ 51,708 $ 45,639 $ 30,772 $ 23,143 $ 18,971 $ 14,091 $ 11,072 $ 48 8,278 $ 129 (68) 6,361 $ 5,382 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 Weighted-average common $ $ $ 1.01 $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40 $ 0.32 $ 0.25 $ 0.22 $ 0.19 1.01 $ 0.94 $ 0.72 $ 0.55 $ 0.45 $ 0.40 $ 0.32 $ 0.25 $ 0.21 $ 0.19 – – 1.01 $ 0.94 $ 0.72 $ – – – 0.55 $ 0.45 $ – 0.40 $ – 0.32 $ – 0.25 $ 0.01 0.22 $ – 0.19 shares outstanding 51,168 48,674 42,476 42,086 41,728 35,640 34,620 32,940 29,436 29,308 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) 1.00 $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39 $ 0.32 $ 0.25 $ 0.22 $ 0.19 1.00 $ 0.92 $ 0.71 $ 0.54 $ 0.45 $ 0.39 $ 0.32 $ 0.25 $ 0.21 $ 0.19 – 1.00 $ – – 0.92 $ 0.71 $ – 0.54 $ – 0.45 $ – 0.39 $ – 0.32 $ – 0.25 $ 0.01 – 0.22 $ 0.19 51,728 49,715 43,204 42,554 42,064 35,804 34,778 33,046 29,436 29,308 13 2000 AR S E L E C T E D C O N S O L I D A T E D F I N A N C I A L D A T A continued … O ’ R E I L L Y A U T O M O T I V E Years ended December 31, (In thousands, except selected operating data) SELECTED OPERATING DATA: Number of stores at 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 year-end (a) 672 571 491 259 219 Total store square footage at year-end (in 000’s) (b) Weighted-average product 4,491 3,777 3,172 1,454 1,155 188 923 165 785 145 671 127 571 116 511 sales per store (in 000’s) (b) $ 1,412 $ 1,423 $ 1,368 $ 1,306 $ 1,239 $ 1,101 $ 1,007 $ 949 $ 838 $ 759 Weighted-average product sales per square foot (b)(f) $ 212.6 $ 216.5 $ 238.0 $ 235.8 $ 242.2 $ 227.3 $ 215.4 $ 208.7 $ 187.2 $ 174.4 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 4.0% 9.6% 6.8% 6.8% 14.4% 8.9% 8.9% 14.9% 11.4% 9.2% 5.0% $ 296,272 $249,351 $208,363 $93,763 $74,403 $ 80,471 $ 41,416 $ 41,193 $15,251 $13,434 Total assets 715,995 610,442 493,288 247,617 183,623 153,604 87,327 73,112 58,871 49,549 Short-term debt 49,121 19,358 13,691 130 3,154 231 311 495 3,462 1,298 Long-term debt, less current portion Long-term debt related to discontinued operations, less current portion 90,463 90,704 170,166 22,641 237 358 461 732 2,668 3,326 – – – – – – – – 9,873 10,316 Shareholders’ equity 463,731 403,044 218,394 182,039 155,782 133,870 70,224 57,805 29,281 22,881 (a) The number of stores at year-end 1991 and 1992 are net of the combinations in each such year of two stores located within one mile of each other. Two stores were closed during 1997, one was closed in 1998 and one was closed in 2000. No other stores were closed during the periods presented. Additionally, seven former Hi/LO stores located in California were sold in 1998. (b) Total square footage includes normal selling, office, stockroom and receiving space. Weighted-average product sales per store and per square foot are weighted to consider the approximate dates of store openings or expansions. (c) Same-store product sales data are calculated based on the change in product sales of only those stores open during both full periods being compared. Percentage increase in same-store product sales is calculated based on store sales results, which exclude sales of specialty machinery, sales by outside salesmen and sales to employees. (d) Beginning January 2000, same-store product sales data are calculated based on the change in product sales of stores open at least one year. 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. (e) There was no additional dilution until 1993 when options were first granted. (f) 1998 does not include stores aquired from Hi/LO. Consolidated weighted-average product sales per square foot were $207.3. 14 2000 AR M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S O ’ R E I L L Y A U T O M O T I V E The following discussion of our financial condition, results of operations and liquidity and capital resources should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this annual report. periods being compared. We calculate the percentage increase in both same-store product sales based on store sales results, which exclude sales of specialty machinery, sales by outside salesmen and sales to employees. 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 Cost of goods sold consists primarily of product costs and warehouse and distribution expenses. Cost of goods sold as a percentage of product sales may be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs. Operating, selling, general and administrative expenses consist primarily of store payroll, store occupancy, advertising expenses, other store expenses and general and administrative expenses, including salaries and related benefits of corporate employees, administrative office occupancy expenses, data processing, professional expenses and other related expenses. 1999 $ 45.6 2000 $ 51.7 $ 50 $ 40 $ 60 2000 $ 890.4 1999 $ 754.1 $ 1000 $ 800 $ 1200 1998 $ 30.8 $ 30 Net Income 1998 $ 616.3 $ 600 Product Sales (millions) $ 20 $ 0 $ 10 1997 $ 23.1 1996 $ 19.0 1995 $ 14.1 $ 1000 (millions) $ 400 $ 0 $ 200 1997 $ 316.4 1996 $ 259.2 1995 $ 201.5 2000 $ 463.7 1999 $ 403.0 $ 500 2000 $ 716.0 1999 $ 610.4 $ 800 $ 1200 $ 400 $ 600 $ 600 Total Assets $ 300 Share- holders' Equity 1998 $ 493.3 (millions) $ 400 $ 0 $ 200 1997 $ 247.6 1996 $ 183.6 1995 $ 153.6 (millions) $ 200 $ 0 1998 $ 218.4 $ 100 1997 $ 182.0 1996 $ 155.8 1995 $ 133.9 15 2000 AR M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S continued … O ' R E I L L Y A U T O M O T I V E Results of Operations The following table sets forth certain income statement data as a percentage of product sales for the years indicated: Years ended December 31, Product sales 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 Net income 2000 1999 100.0% 100.0% 100.0% 1998 57.0 43.0 32.9 10.1 (0.8) 9.3 3.5 5.8% 56.9 43.1 32.9 10.2 (0.5) 9.7 3.6 6.1% 58.2 41.8 32.6 9.2 (1.1) 8.1 3.1 5.0% 2000 Compared to 1999 Product sales increased $136.3 million, or 18.1% from $754.1 million in 1999 to $890.4 million in 2000, due to 101 net additional stores opened during 2000, and a $28.0 million, or 4.0% increase in same-store product sales for stores opened in both full periods. We believe that the increased product sales achieved by the existing stores are the result of our offering a broader selection of products in most stores, an increased promotional and advertising effort through a variety of media and localized promotional events, and continued improvement in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to increased sales. Gross profit increased 17.6% from $325.3 million (or 43.1% of product sales) in 1999 to $382.7 million (or 43.0% of product sales) in 2000. Operating, selling, general and administrative expenses increased $44.3 million from $248.4 million (or 32.9% of product sales) in 1999 to $292.7 million (or 32.9% of product sales) in 2000. The increase in these expenses in dollar amount was primarily attributable to increased salaries and benefits, rent and other costs associated with the addition of employees and facilities to support the increased level of our operations. Other expense, net, increased by $3.0 million from $3.9 million in 1999 to $6.9 million in 2000. The increase was primarily due to interest expense on increased borrowings under our credit facility. 16 2000 AR Provision for income taxes increased from $27.4 million in 1999 (37.5% effective tax rate) to $31.5 million in 2000 (37.8% effective tax rate). The increase in the dollar amount was primarily due to the increase of income before income taxes. The nominal increase in the effective tax rate was primarily due to changes in the apportionment of sales between states with differing tax rates. Principally as a result of the foregoing, net income in 2000 was $51.7 million (or 5.8% of product sales), an increase of $6.1 million (or 13.3%) from net income in 1999 of $45.6 million (or 6.1% of product sales). 1999 Compared to 1998 Product sales increased $137.8 million, or 22.4% from $616.3 million in 1998 to $754.1 million in 1999, due to 80 net additional stores opened during 1999, and a $56.4 million, or 9.6% increase in same-store product sales. We believe that the increased product sales achieved by the existing stores are the result of our offering of a broader selection of products in most stores, an increased promotional and advertising effort through a variety of media and localized promotional events, and continued improvement in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to increased sales. Gross profit increased 26.2% from $257.9 million (or 41.8% of product sales) in 1998 to $325.3 million (or 43.1% of product sales) in 1999. The increase in gross profit margin was primarily attributable to the continued improvements in our product acquisition programs and improved buying power due to the number of net new stores opened in 1999. Operating, selling, general and administrative expenses increased $47.4 million from $201.0 million (or 32.6% of product sales) in 1998 to $248.4 million (or 32.9% of product sales) in 1999. The increase in these expenses in dollar amount and as a percentage of sales primarily resulted from higher costs for employee medical and workers’ compensation benefits, the continued conversion of Hi-Lo Automotive, Inc. (“Hi/LO”) stores and distribution center, as well as the addition of employees and facilities to support the increased level of our operations. Other expense, net, decreased by $3.1 million from $7.0 million in 1998 to $3.9 million in 1999. The decrease was primarily due to the decrease in interest expense as a result of repayments of indebtedness under our syndicated credit facility with a portion of the net proceeds of our secondary offering. Our provision for income taxes was 37.5% and 38.4%, respectively, of income before income taxes in 1999 and 1998. The decrease in the effective tax rate primarily related to a higher percentage of our sales occurring in states with lower income tax rates. Principally as a result of the foregoing, net income in 1999 was $45.6 million (or 6.1% of product sales), an increase of $14.9 million (or 48.3%) from net income in 1998 of $30.8 million (or 5.0% of product sales). Liquidity and Capital Resources Net cash provided by operating activities was $5.8 million in 2000 and $29.7 million in 1999. Net cash used in operating activities was $19.1 million in 1998. 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. The increase in net cash provided by operating activities in 1999 compared to 1998 is the result of increases in net income, accrued payroll, other current liabilities and a larger tax benefit resulting from stock option exercises, offset by increases in amounts receivable from vendors and inventory. Net cash used in investing activities was $40.5 million in 2000, $77.8 million in 1999 and $100.8 million in 1998. The decrease in cash used in 2000 was primarily due to the sale of 90 properties for $52 million in a sale-leaseback transaction. The decrease in cash used in 1999 was due to the Hi/LO acquisition in 1998 and an increase in payments received on notes receivable, partially offset by increased purchases of property and equipment. The increase in cash used in 1998 was primarily due to the purchase of Hi/LO and increased capital expenditures. 1996 $ 1,239 1995 $ 1,101 1997 $ 1,306 1998 $ 1,368 2000 $ 1,412 1999 $ 1,423 $ 1,250 $ 1,000 $ 1,500 $ 750 (thousands) $ 500 $ 0 $ 250 Weighted Average Product Sales Per Store 1999 $ 217 1995 $ 227 2000 $ 213 $ 225 1997 $ 236 1998 $ 238 1996 $ 242 $ 200 $ 250 $ 175 (dollars) $ 150 $ 100 $ 125 Weighted Average Product Sales Per Square Foot 1998 77.9% 80% 100% 60% Long -Term Debt to Equity (percent) 40% 0% 20% 1999 22.5% 2000 19.5% 1997 12.4% 1995 0.2% 1996 0.3% 20% 1996 14.4% 16% 24% Same-Store Product Sales Growth 12% (percent) 8% 0% 1999 9.6% 1995 8.9% 1997 6.8% 1998 6.8% 4% 2000 4.0% 17 2000 AR M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S continued … O ' R E I L L Y A U T O M O T I V E 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 initial ten-year period and two additional successive periods of five years each. The resulting gain of $4.5 million has been deferred and is being amortized over the initial lease term. Net rent expense during the initial term will be approximately $5.5 million annually and is included in the table of future minimum annual rental commitments under non- cancelable operating leases. Proceeds from the transaction were used to reduce outstanding borrowings under our Revolving Credit Facility. Capital expenditures were $82.0 million in 2000, $86.0 million in 1999 and $57.7 million in 1998. These expenditures were primarily related to the opening of new stores, as well as the relocation or remodeling of existing stores. We opened 101, 80 and 50 net stores in 2000, 1999 and 1998, respectively. We remodeled or relocated eight stores in both 2000 and in 1999, and 18 stores in 1998. Two new distribution centers were acquired; one in October 2000, located in Little Rock, Arkansas, and the other in December 1999, located in Dallas, Texas. On December 15, 2000, we entered into a $50 million Synthetic Operating Lease Facility (“Synthetic Facility” or “the Facility”) with a group of financial institutions. Under the Facility, the Lessor acquires land to be developed for O’Reilly Auto Parts stores and funds our development thereof as the Construction Agent and Guarantor. We subsequently lease the property from the Lessor for an initial term of five years with two additional successive renewal periods of five years each. The Facility provides for a residual value guarantee and purchase options on the properties. It also contains a provision for an event of default whereby the Lessor, among other things, may require us to purchase any or all of the properties. We plan to utilize the Facility to finance a portion of our planned store growth for 2001. Funding under the Facility at December 31, 2000, totaled $1.0 million. Our continuing store expansion program requires significant capital expenditures and working capital principally for inventory requirements. The costs associated with the opening of a new store (including the cost of land acquisition, improvements, fixtures, inventory and computer equipment) are estimated to average approximately $900,000 to $1.1 million; however, such costs may be significantly reduced where we lease, rather than purchase, the store site. Although the cost to acquire the business of an independently owned parts store varies, depending primarily upon the amount of inventory and the amount, if any, of real estate being acquired, we estimate that the average cost to acquire such a business and convert it to one of our stores is approximately $400,000. We plan to finance our expansion program through cash expected to be provided from operating activities and available borrowings under our existing credit facilities and the Synthetic Facility. On November 4, 1999, the Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend to all shareholders of record as of 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 totaling $175 million. The facility was reduced to $165 million in 1999 and further reduced to $152.5 million in 2000. The facility is comprised of a $125 million revolving loan, a $5 million sublimit for the issuance of letters of credit and a $27.5 million term loan. This credit facility is guaranteed by our subsidiaries. At December 31, 2000, the effective interest rate on the revolving and term loan portions, which each mature on January 27, 2003, was 7.0% per annum. At December 31, 2000, $50.2 million in borrowings was available under this credit facility. 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- and long-term capital needs for the foreseeable future. Inflation and Seasonality We succeeded, in many cases, in reducing the effects of merchandise cost increases principally by taking advantage of vendor incentive programs, economies of scale resulting from increased volume of purchases and selective forward buying. As a result, we do not believe that our operations have been materially affected by inflation. Our business is somewhat seasonal, primarily as a result of the impact of weather conditions on store sales. Store sales and profits have historically been higher in the second and third quarters (April through September) of each year than in the first and fourth quarters. 18 2000 AR Quarterly Results The following table sets forth certain quarterly unaudited operating data for fiscal 2000 and 1999. The unaudited quarterly information includes all adjustments which management considers necessary for a fair presentation of the information shown. The unaudited operating data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report, and the other financial information included here. (In thousands, except per share data) Fiscal 2000 First Quarter Second Quarter Third Quarter Fourth Quarter New Accounting Standards In 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which is required to be adopted in years beginning after June 15, 2000. We do not anticipate that the adoption of SFAS No. 133 will have a significant effect on the financial position or the results of our operations. Product sales Gross profit Operating income Net income Basic net income per common share Net income per common share – assuming dilution $ 195,758 $ 226,359 $ 251,413 $ 216,891 94,865 16,945 9,210 105,863 28,805 16,572 84,712 19,486 11,567 97,261 24,793 14,359 0.23 0.28 0.32 0.18 0.23 0.28 0.32 0.18 (In thousands, except per share data) Fiscal 1999 First Quarter Second Quarter Third Quarter Fourth Quarter $ 166,404 $ 196,107 $ 208,401 $ 183,210 84,509 18,818 11,855 88,001 22,231 13,412 81,823 19,630 11,769 70,957 16,241 8,603 Product sales Gross profit Operating income Net income Basic net income per common share Net income per common share – assuming dilution 0.20 0.23 0.26 0.23 0.20 0.23 0.26 0.23 19 2000 AR C O N S O L I D A T E D B A L A N C E S H E E T S O ’ R E I L L Y A U T O M O T I V E (In thousands) December 31, Assets Current assets: Cash Short-term investments Accounts receivable, less allowance for doubtful accounts of $135 in 2000 and $681 in 1999 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 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 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 – 51,544,879 in 2000 and 50,799,353 in 1999 Additional paid-in capital Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes. 20 2000 AR 2000 1999 $ 9,204 500 32,673 29,175 372,069 92 1,402 4,089 449,204 46,740 109,835 34,750 106,068 25,628 323,021 76,167 246,854 2,836 17,101 $ 715,995 $ 35,000 1,011 68,947 9,309 9,360 15,184 14,121 152,932 90,463 4,086 4,783 $ 9,791 500 26,462 25,984 293,924 2,333 1,776 3,583 364,353 54,631 112,270 25,841 80,569 19,495 292,806 56,289 236,517 3,501 6,071 $ 610,442 $ 5,000 – 64,885 6,278 10,382 14,099 14,358 115,002 90,704 1,215 477 – – 515 230,600 232,616 463,731 $ 715,995 508 221,628 180,908 403,044 $ 610,442 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E O ’ R E I L L Y A U T O M O T I V E (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 accompanying notes. 2000 $ 890,421 507,720 292,672 800,392 90,029 (8,362) 439 1,053 (6,870) 83,159 31,451 $ 51,708 1999 $ 754,122 428,832 248,370 677,202 76,920 (5,343) 402 1,045 (3,896) 73,024 27,385 $ 45,639 1998 $ 616,302 358,439 200,962 559,401 56,901 (8,126) 396 772 (6,958) 49,943 19,171 $ 30,772 $ 1.01 51,168 $ 0.94 48,674 $ 0.72 42,476 $ 1.00 51,728 $ 0.92 49,715 $ 0.71 43,204 21 2000 AR C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y O ’ R E I L L Y A U T O M O T I V E (In thousands) Balance at December 31, 1997 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, 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 See accompanying notes. Common Stock Shares 42,250 Par Value $ 211 Additional Paid-In Capital $ 77,077 Retained Earnings $ 104,751 Total $ 182,039 184 266 – – 42,700 7,002 176 922 – – – 50,800 364 381 – – 51,545 1 1 – – 213 35 1 5 – 254 – 508 3 2,720 2,022 839 – 82,658 124,535 3,829 6,521 4,085 – – 221,628 – – – 30,772 135,523 – – – – (254) 45,639 180,908 2,721 2,023 839 30,772 218,394 124,570 3,830 6,526 4,085 – 45,639 403,044 4,535 – 4,538 4 – – $ 515 3,460 977 – $ 230,600 – – 51,708 $ 232,616 3,464 977 51,708 $ 463,731 22 2000 AR C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S O ’ R E I L L Y A U T O M O T I V E (In thousands) Years ended December 31, Operating activities Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and 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 Post-retirement benefits 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 Other assets Accounts payable Income taxes payable Accrued payroll Accrued benefits and withholdings Other current liabilities Other liabilities Net cash provided by (used in) operating activities Investing activities Purchases of property and equipment Acquisition, net of cash acquired Proceeds from sale of property and equipment Proceeds from sale of short-term investments 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 accompanying notes. 2000 1999 1998 $ 51,708 $ 45,639 $ 30,772 24,812 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) 17,902 961 (82) 5,455 2,339 4,085 12 157 (1,644) (47,912) 693 734 (1,931) (1,852) – 1,479 2,038 3,386 (1,744) 29,715 (86,002) – 7,039 – 1,265 (70) – (77,768) 30,000 – 431,159 (432,415) – 5,354 34,098 (587) 9,791 $ 9,204 7,130 (7,130) 172,892 (249,363) 124,570 8,017 56,116 8,063 1,728 9,791 $ 12,164 250 (134) 7,629 1,629 839 12 (5,809) (21,691) (53,328) (5,527) (179) (1,753) 20,071 – (3,533) 2,156 (2,681) – (19,113) (57,732) (49,296) 6,038 500 372 (650) –– (100,768) 5,000 – 157,860 (46,651) – 3,115 119,324 (557) 2,285 1,728 $ 23 2000 AR N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S O ’ R E I L L Y A U T O M O T I V E NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business O’Reilly Automotive, Inc. (“the Company”) is a specialty retailer and supplier of automotive aftermarket parts, tools, supplies and accessories to both the DIY customer and the professional installer throughout Arkansas, Illinois, Iowa, Kansas, Louisiana, Missouri, Nebraska, Oklahoma and Texas. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue Recognition The Company recognizes sales upon shipment of products. Use of Estimates The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States (“GAAP”), requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Inventory Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. Cost has been determined using the last-in, first-out (“LIFO”) method. If the first-in, first-out (“FIFO”) method of costing inventory had been used by the Company, inventory would have been $369,869,000 and $291,077,000 as of December 31, 2000, and 1999, respectively. Amounts Receivable from Vendors Amounts receivable from vendors consist primarily of amounts due the Company for changeover merchandise, rebates and other allowances. Property and Equipment Property and equipment are carried at cost. Depreciation is provided on straight-line and accelerated methods over the estimated useful lives of the assets. Service lives for property and equipment generally range from three to forty years. Leasehold improvements are amortized over the terms of the underlying leases. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated 24 2000 AR depreciation are eliminated and the gain or loss, if any, is included in the determination of net income as a component of other income (expense). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company capitalizes interest costs as a component of construction in progress, based on the weighted-average rates paid for long-term borrowings. Total interest costs capitalized for the years ended December 31, 2000, 1999 and 1998, were $1,354,000, $1,134,000 and $1,213,000, respectively. Income Taxes The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109. The liability method provides that deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Advertising Costs The Company expenses advertising costs as incurred. Advertising expense charged to operations amounted to $12,150,000, $9,428,000 and $8,326,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Financial Instrument The Company utilizes interest rate swap agreements to manage interest rate risk on its floating rate debt. During 1998, the Company entered into an interest-rate swap agreement to modify the interest characteristics of its outstanding long-term debt from a floating rate to a fixed rate basis. This agreement involves the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. The related amount payable to or receivable from the counterparty is included in other liabilities or assets. The fair value of the swap agreement is not recognized in the consolidated financial statements and approximates its carrying cost. Pre-opening Costs Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to operations as incurred. NOTE 2 – ACQUISITION Effective January 31, 1998, the Company acquired 100% of the outstanding capital stock of Hi-Lo Automotive, Inc. and its subsidiaries (“Hi/LO”). Hi/LO was a specialty retailer supplying automotive aftermarket tools, supplies and accessories principally throughout Texas and Louisiana. The purchase price was approximately $49.3 million, including acquisition costs. The purchase price was financed with long-term borrowings under the Company’s credit facility. The acquisition was accounted for using the purchase method of accounting and accordingly, the results of operations of Hi/LO have been included in the Company’s results of operations since the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values. The excess of net assets acquired over the purchase price, which totaled approximately $9.7 million, has been applied as a reduction to the acquired property and equipment. Additional purchase liabilities recorded included approximately $5,622,000 for severance and certain costs associated with the closure and consolidation of certain acquired stores, none of which remained on the balance sheet at December 31, 1999. The following unaudited pro forma financial information presents the combined historical results of the Company and Hi/LO as if the acquisition had occurred at January 1, 1998, after giving effect to certain adjustments, including the application of the excess of net assets acquired over the purchase price to the acquired property and equipment and resulting effect on depreciation, increased interest expense on long-term debt related to the acquisition, and the related income tax effects. (In thousands, except per share data) Product sales Net income Net income per share-assuming dilution 1998 634,072 29,443 0.68 $ $ $ The pro forma combined results are not necessarily indicative of the results that would have occurred if the acquisition had been completed as of January 1, 1998. NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued Stock Option Plans The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in accounting for its employee stock options because, as discussed in Note 11, the alternative fair value accounting provided for under SFAS No. 123, “Accounting for Stock-Based Compensation,” requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Concentration of Credit Risk The Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Generally, the Company does not require security when trade credit is granted to customers. Credit losses are provided for in the Company’s consolidated financial statements and consistently have been within management’s expectations. The Company has provided long-term financing to a company, through a note receivable, for the construction of an office building which is leased by the Company (see Note 7). The note receivable, amounting to $2,066,000 and $2,137,000 at December 31, 2000 and 1999, 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, accounts payable and long-term debt, as reported in the accompanying consolidated balance sheets, approximates fair value. Reclassifications The reclassifications of certain amounts have been made to the 1999 and 1998 consolidated financial statements to conform to the 2000 presentation. New Accounting Pronouncements In 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as deferred by SFAS No. 137, which is required to be adopted in years beginning after June 15, 2000. The Company does not anticipate that the adoption of SFAS No. 133 will have a significant effect on its financial position or results of operations. 25 2000 AR N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S continued … O ’ R E I L L Y A U T O M O T I V E NOTE 3 – SHORT-TERM INVESTMENTS The Company’s short-term investments are classified as available- for-sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and are carried at cost, which approximates fair market value. At December 31, 2000, and 1999, short-term investments consisted of preferred equity securities. NOTE 4 – RELATED PARTIES The Company leases certain land and buildings related to its O’Reilly Auto Parts stores under six-year operating lease agreements with O’Reilly Investment Company and O’Reilly Real Estate Company, partnerships in which certain shareholders of the Company are partners. Generally, these lease agreements provide for renewal options for an additional six years at the option of the Company. 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 $2,671,000, $2,647,000 and $2,158,000 in 2000, 1999 and 1998, respectively. NOTE 5 – NOTE PAYABLE TO BANK At December 31, 2000, the Company had available short-term unsecured bank lines of credit providing for maximum borrowings of $10 million, all of which was outstanding at December 31, 2000, and $5 million of which was outstanding at December 31, 1999. The lines of credit bear interest at LIBOR plus 0.50% (7.25% at December 31, 2000). 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. This line of credit was paid in full on January 9, 2001. The line of credit bears interest at LIBOR plus 0.75% (7.45% at December 31, 2000). The weighted-average interest rate for all lines of credit for the years ended December 31, 2000, and 1999 was 7.2% and 6.7%, respectively. NOTE 6 – LONG-TERM DEBT At December 31, 2000, the Company had available an unsecured credit facility providing for maximum borrowings of $152.5 million. The facility is comprised of a revolving credit facility of $125 million and a term loan of $27.5 million. At December 31, 1999, the Company had available a credit facility providing for maximum borrowings of $165 million. The facility was comprised of a $125 million revolving credit facility and a $40 million term loan. 26 2000 AR At December 31, 2000, and 1999, $74,755,000 and $61,560,000, respectively, of the revolving credit facility and $27.5 million and $40 million, respectively, of the term loan were outstanding. The credit facility, which bears interest at LIBOR plus 0.50% (7.0% at December 31, 2000), expires in January 2003. During 2000 and 1999, the Company leased certain computer equipment under capitalized leases. The lease agreements are three-year terms expiring from 2001 to 2003. At December 31, 2000, the monthly installments under these agreements were approximately $180,000. The present value of the future minimum lease payments under these agreements totaled $2,232,000 and $3,362,000 at December 31, 2000, and 1999, respectively, which has been classified as long-term debt in the accompanying consolidated financial statements. During 2000 and 1999, the Company purchased $800,000 and $2,676,000, respectively, of assets under capitalized leases. Additionally, the Company has various unsecured notes payable to individuals, amounting to $97,000 and $140,000, at December 31, 2000, and 1999, respectively. The notes bear interest at rates ranging from 7.75% to 9.0% and are due in monthly installments of approximately $1,500 including interest. Only one note remained at December 31, 2000, which matures in 2008. Indirect borrowings under letters of credit provided by a $5,000,000 sublimit of the revolving credit facility totaled $648,510 and $1,275,000 at December 31, 2000, and 1999, respectively. These letters of credit reduced availability of borrowings at December 31, 2000, and 1999. Principal maturities of long-term debt for each of the next five years ending December 31 are as follows: (In thousands) 2001 2002 2003 2004 2005 Thereafter $ 14,121 11,715 78,684 13 14 37 $ 104,584 Cash paid by the Company for interest during the years ended December 31, 2000, 1999 and 1998 amounted to $8,240,000, $6,134,000 and $8,509,000, respectively. NOTE 7 – COMMITMENTS Lease Commitments During 1999, the Company entered into a Master Lease Agreement with O’Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company) related to the sale and leaseback of certain properties. The transaction closed on January 4, 1999, with a purchase price of approximately $5.5 million. The lease calls for an initial term of 15 years with two five-year renewal options. 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 will be approximately $5.5 million annually and is included in the table of future mini- mum annual rental commitments under non-cancelable operating leases. Proceeds from the transaction were used to reduce out- standing borrowings under the Company’s Revolving Credit Facility. On December 15, 2000, the Company entered into a $50 million Synthetic Operating Lease Facility (“the Facility”) with a group of financial institutions. Under the Facility, the Lessor acquires land to be developed for O’Reilly Auto Parts stores and funds the development thereof by the Company as the Construction Agent and Guarantor. The Company subsequently leases the property from the Lessor for an initial term of five years with two additional successive renewal periods of five years each. The Facility provides for a residual value guarantee 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 plans to utilize the Facility to finance a portion of its planned store growth for 2001. Funding under the Facility at December 31, 2000, totaled $1.0 million. The Company also leases certain office space, retail stores, property and equipment under long-term, non-cancelable operating leases. Most of these leases include renewal options and some include options to purchase and provisions for percentage rent based on sales. At December 31, 2000, future minimum rental payments under all of the Company’s operating leases for each of the next five years and in the aggregate are as follows: (In thousands) 2001 2002 2003 2004 2005 Thereafter Related Parties Non-related Parties Total $ 2,032 $ 19,823 $ 21,855 20,196 18,239 18,034 16,874 16,437 15,436 13,938 13,273 117,880 112,305 $ 12,390 $ 195,950 $ 208,340 1,957 1,160 1,001 665 5,575 Rental expense amounted to $16,219,000, $14,122,000 and $13,862,000 for the years ended December 31, 2000, 1999, and 1998, respectively. Other Commitments The Company had construction commitments, which totaled approximately $7.0 million, at December 31, 2000. NOTE 8 – LEGAL PROCEEDINGS The Company is currently involved in litigation as a result of a complaint filed against Hi/LO in May 1997. The plaintiff in this lawsuit sought to certify a class action on behalf of persons or entities in the states of Texas, Louisiana and California that have purchased a battery from Hi/LO since May 1990. The complaint alleges that Hi/LO offered and sold “old,” “used” and “out of warranty” batteries as if the batteries were new, resulting in claims for violations of deceptive trade practices, breach of contract, negligence, fraud, negligent misrepresentation and breach of warranty. The plaintiff is seeking, on behalf of the class, an unspecified amount of compensatory and punitive damages, as well as attorneys’ fees and pre- and post-judgment interest. On July 27, 1998, the Trial Court certified this class. The Company appealed the decision to certify the class in the Court of Appeals for the Ninth District of Texas. On February 25, 1999, the Court of Appeals issued an opinion affirming the Trial Court’s decision to certify the class. At that time, the Company appealed the opinion by seeking a mandamus from the Supreme Court of Texas. On April 6, 1999, the Supreme Court of Texas asked the plaintiff to 27 2000 AR N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S continued … O ’ R E I L L Y A U T O M O T I V E NOTE 8 – LEGAL PROCEEDINGS continued file a response, which was filed on April 14, 1999. On May 3, 1999, the Company filed a reply to that response. On June 6, 2000, the Supreme Court of Texas denied the appeal for a mandamus. On January 15, 2001, the Company reached a favorable verbal settlement with the plaintiffs’ counsel. The settlement documents are currently being prepared and will be subject to the approval of the Trial Court. The Company believes that this lawsuit will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows. 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 incur from any of these matters, it does not currently believe that, in the aggregate, they will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. NOTE 9 – INTEREST RATE RISK MANAGEMENT The Company entered into an interest rate swap agreement to effectively convert a portion of its floating rate long-term debt to a fixed rate basis, thereby reducing the impact of interest rate changes on future income. Pursuant to this pay-fixed swap agreement, the Company agreed to exchange, at specified intervals, the difference between the fixed and the floating interest amounts calculated on the notional amount of the swap agreement which totaled $50 million, $50 million and $100 million, respectively, at January 27, 2000, December 31, 1999, and 1998. The Company’s fixed interest rate under the swap agreement was 5.66% and the counterparty’s floating rate was 6.20% at January 27, 2000, and December 31, 1999. The swap agreement expired on January 27, 2000. NOTE 10 – EMPLOYEE BENEFIT PLANS The Company sponsors a contributory profit sharing and savings plan that covers substantially all employees who are 21 years of age with at least six months of service. Employees may contribute up to 15% of their annual compensation subject to Internal Revenue Code maximum limitations. The Company has agreed to make matching contributions equal to 50% of the first 2% of each employee’s contribution and 25% of the next 2% of each employee’s contribution. Additional contributions to the plan may be made as determined annually by the Board of Directors. After three years of service, Company contributions and earnings thereon vest at the rate of 20% per year. Company contributions charged to operations amounted to $2,454,000 in 2000, $2,618,000 in 1999 and $1,818,000 in 1998. Company contributions, in the form of common stock, to the profit sharing and savings plan to match employee contributions during the years ended December 31 were as follows: Year Contributed 2000 1999 1998 Shares 49,891 29,481 31,438 Market Value $724,000 658,000 514,000 Profit sharing contributions accrued at December 31, 2000, 1999, and 1998 funded in the next year through the issuance of shares of the Company’s common stock were as follows: Year Funded 2000 1999 1998 Shares 132,890 60,640 72,386 Market Value $1,919,000 1,300,000 1,070,000 The Company also sponsors an unfunded 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, 2000, 1999, and 1998 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, 147,315 shares were issued at a weighted-average price of $12.83 per share during 2000, 78,927 shares were issued at a weighted-average price of $18.90 per share during 1999, and 74,632 shares were issued at a weighted-average price of $15.05 per share during 1998. The Company has in effect a performance incentive plan for the Company’s senior management under which 400,000 shares of restricted stock are reserved for future issuance. Under the plan, 12,164 shares, 6,796 shares and 5,358 shares were issued during 2000, 1999 and 1998, respectively. 28 2000 AR NOTE 11 – 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 reserved for future issuance under this plan. The exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and the options will expire no later than 10 years from the date of grant. Options granted pursuant to the plan become exercisable no sooner than six months from the date of grant. In the case of a shareholder owning more than 10% of the outstanding stock of the Company, the exercise price of an incentive option may not be less than 110% of the fair market value of the stock on the date of grant, and such options will expire no later than 10 years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable for the first time by any individual in any calendar year may not exceed $100,000. A summary of outstanding stock options is as follows: Outstanding at December 31, 1997 Granted Exercised Canceled Forfeitures Outstanding at December 31, 1998 Granted Exercised Canceled Forfeitures Outstanding at December 31, 1999 Granted Exercised Canceled Outstanding at December 31, 2000 Price per Share Number of Shares $ 4.38 – 14.00 12.38 – 22.91 4.38 – 16.07 4.38 – 20.88 4.38 5.94 – 22.91 18.44 – 26.75 5.94 – 18.75 6.75 – 26.38 6.07 6.07 – 26.75 10.56 – 24.38 6.07 – 22.75 10.00 – 25.88 2,672,400 823,750 (238,600) (68,700) (5,000) 3,183,850 1,148,000 (948,620) (35,750) (1,000) 3,346,480 581,250 (361,875) (206,625) $ 8.00 – 26.75 3,359,230 Options to purchase 1,729,033, 1,171,888 and 855,100 shares of common stock were exercisable at December 31, 2000, 1999, and 1998, respectively. 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 a director or seven years. Options granted under this plan become exercisable six months from the date of grant. A summary of outstanding stock options is as follows: Outstanding at December 31, 1997 Granted Exercised Canceled Outstanding at December 31, 1998 Granted Exercised Canceled Outstanding at December 31, 1999 Granted Exercised Canceled Outstanding at December 31, 2000 Price per Share $ 4.38 – 9.10 13.50 4.38 – 6.56 – 13.50 23.91 – – 6.56 – 23.91 12.44 6.56 – 6.75 – Number of Shares 60,000 20,000 (10,000) – 70,000 20,000 – – 90,000 20,000 (20,000) – $ 9.09 – 23.91 90,000 All options under this plan were exercisable at December 31, 2000, 1999, and 1998. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee and non-employee director stock options under the fair value method of that SFAS. The fair values for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of 5.02%, 6.54% and 4.74%; volatility factors of the expected market price of the Company’s common stock of .442, .247, .221; and weighted-average expected life of the options of 8.9, 8.0 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, 2000, 1999, and 1998 were $9.24, $10.22 and $6.44, respectively. The weighted-average remaining contractual life at December 31, 2000, for all outstanding options under the Company’s stock option plans is 7.1 years. The weighted-average exercise price for all outstanding options under the Company’s stock option plans was $16.12 at December 31, 2000. 29 2000 AR N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S continued … O ’ R E I L L Y A U T O M O T I V E NOTE 11 – STOCK OPTION PLANS continued The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The effects of applying SFAS No. 123 for pro forma disclosures are not likely to be representative of the effects on reported net income or losses for future years. The Company’s pro forma informa- tion follows: (In thousands, except per share data) Pro forma net income Pro forma basic net income per share Pro forma net income per share – assuming dilution 2000 1999 1998 $ 48,177 $ 43,501 $ 29,242 $ 0.94 $ 0.89 $ 0.69 $ 0.93 $ 0.88 $ 0.67 NOTE 12 – INCOME PER COMMON SHARE The following table sets forth the computation of basic and diluted income per common share: (In thousands, except per share data) Years ended December 31, Numerator (basic and 2000 1999 1998 diluted): Net income Denominator: Denominator for basic income per common share – weighted- average shares Effect of stock options (Note 11) 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 $ 51,708 $ 45,639 $ 30,772 51,168 48,674 42,476 560 1,041 728 51,728 49,715 43,204 $ 1.01 $ 0.94 $ 0.72 $ 1.00 $ 0.92 $ 0.71 30 2000 AR NOTE 13 – INCOME TAXES The provision for income taxes consists of the following: Deferred income taxes reflect the net tax effects of temporary dif- ferences 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: (In thousands) Deferred tax assets: Current: Allowance for doubtful accounts Other accruals Noncurrent: Other Total deferred tax assets Deferred tax liabilities: Current: 2000 1999 $ 51 2,960 3,011 834 3,845 $ 226 3,586 3,812 1,306 5,118 (In thousands) 2000: Federal State 1999: Federal State 1998: Federal State Current Deferred Total $ 25,120 3,086 $ 28,206 $ 2,946 299 $ 3,245 $ 28,066 3,385 $ 31,451 $ 19,934 1,996 $ 21,930 $ 4,959 496 $ 5,455 $ 24,893 2,492 $ 27,385 $ 10,386 1,156 $ 11,542 $ 6,852 777 $ 7,629 $ 17,238 1,933 $ 19,171 A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows: Inventory carrying value 1,609 2,036 (In thousands) Noncurrent: Property and equipment Total deferred tax liabilities Net deferred tax assets (liabilities) 4,920 6,529 $ (2,684) 2,521 4,557 561 $ 2000 1999 1998 Federal income taxes at statutory rate State income taxes, net of federal tax benefit Other items, net $ 29,106 $ 25,558 $ 17,480 2,200 145 $ 31,451 1,625 202 $ 27,385 1,256 435 $ 19,171 The tax benefit associated with the exercise of non-qualified stock options has been reflected as additional paid-in capital in the accompanying consolidated financial statements. During the years ended December 31, 2000, 1999, and 1998, cash paid by the Company for income taxes amounted to $24,244,000, $17,151,000 and $16,229,000, respectively. 31 2000 AR N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S continued … O ’ R E I L L Y A U T O M O T I V E NOTE 14 – STOCK SPLIT NOTE 16 – QUARTERLY FINANCIAL DATA – UNAUDITED On November 8, 1999, the Company’s Board of Directors declared a two-for-one stock split to be effected in the form of a 100% stock dividend payable to all shareholders of record as of 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 retroactive effect of the stock split for all periods presented. NOTE 15 – PUBLIC OFFERING OF COMMON STOCK In March 1999, the Company completed a secondary public offer- ing of 7,002,000 shares of common stock. Pursuant to this offer- ing, the Company issued 7,002,000 shares of common stock resulting in net proceeds to the Company of $124,570,000. A por- tion of the proceeds was used to repay the Company’s outstanding indebtedness under its bank credit facilities. The remaining portion of the proceeds was used to fund the Company’s expansion. (In thousands, except per share data) Year ended First Quarter December 31, 2000 Second Quarter Third Quarter Fourth Quarter Product sales Gross profit Operating income Net income Basic net income per share Net income per share – assuming dilution $ 195,758 84,712 $ 226,359 97,261 $ 251,413 $ 216,891 94,865 105,863 19,486 11,567 24,793 14,359 28,805 16,572 16,945 9,210 0.23 0.28 0.32 0.18 0.23 0.28 0.32 0.18 (In thousands, except per share data) First Year ended Quarter December 31, 1999 Second Quarter Third Quarter Fourth Quarter Product sales Gross profit Operating income Net income Basic net income per share Net income per share – assuming dilution $ 166,404 70,957 $ 196,107 81,823 $ 208,401 $ 183,210 84,509 88,001 16,241 8,603 19,630 11,769 22,231 13,412 18,818 11,855 0.20 0.23 0.26 0.23 0.20 0.23 0.26 0.23 The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these interim periods presented have been included. 32 2000 AR R E P O R T O F I N D E P E N D E N T A U D I T O R S O ’ R E I L L Y A U T O M O T I V E 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, 2000 and 1999, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000, and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Kansas City, Missouri February 23, 2001 33 2000 AR D I R E C T O R S A N D E X E C U T I V E C O M M I T T E E Chub O’Reilly Chairman of the Board Emeritus and Director Charlie O’Reilly Vice Chairman of the Board and Director 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/Real Estate Greg Henslee President of Merchandise/ Systems/Distribution Paul Lederer (1) Director Director R & B, Inc. Director Woods Equipment Co. Director FPM, Inc. Director Trans-Pro, Inc. Advisory Board Richco, Inc. Advisory Board Turtlewax, Inc. Advisory Board Ampere Products Advisory Board The Wine Discount Center (Director 1993 – July 1997; Feb. 2001) Jay Burchfield (1)(2) Director Chairman of the Board of City Bancorp Chairman of the Board of Trust Company of the Ozarks President of Oklahoma City Bakery, Inc. Director of The Primary Care Network (Director since 1997) Joe C. Greene (1)(2) Director 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 Alan Fears Vice President of Expansion and Acquisitions Tricia Headley Vice President of Corporate Services/ Corporate Secretary Pat O’Reilly Vice President of Distribution Steve Pope Vice President of Human Resources Larry Pryor Vice President of Merchandise Jeff Shaw Vice President of Southern Division Jerry Skaggs Vice President of Sales Mike Williams Vice President of Information Systems (1) Member of Audit Committee (2) Member of Compensation Committee O P E R A T I N G M A N A G E M E N T SENIOR MANAGEMENT Allen Alexander Director of Des Moines Region Keith Childers Director of Little Rock Region Jack House Director of Customer Services Barry Sabor Director of Loss Prevention Buddy Ball Director of Kansas City Region Ken Cope Director of Dallas Rural Region Randy Johnson Director of Inventory Control Denny Smith Director of Springfield Region Tony Bartholomew Director of Southern Division Sales Charlie Downs Director of Store Expansion Brad Knight Director of Pricing Bert Bentley Director of Houston Region Phyllis Evans Director of Store Administration Doug Bragg Director of Oklahoma Region Michelle Bright Director of Finance Mary Brown Director of Human Resources John Grassham Director of Dallas Region Joe Hankins Director of Store Design Jaime Hinojosa Director of Valley Region 34 2000 AR Jim Maynard Director of Employment/Team Member Relations Dick Smith Director of Construction and Real Estate Development Charlie Stallcup Director of Training Kim Mesenbrink Director of Accounting David Strom Director of Houston Region Wayne Price Director of Risk Management Mike Swearengin Director of Merchandise Steve Rice Director of Credit and Collections Danny Woods Director of Installer Marketing O P E R A T I N G M A N A G E M E N T continued … CORPORATE MANAGEMENT Tom Allen Computer Operations Manager Keith Asby National Accounts Manager Jeanene Asher Telecommunications Manager Mike Ballard PC Development Manager Yvonne Ballew Payroll Manager Cecil Davis Assistant Distribution Center Manager Joe Edwards Store Installations Manager Paula Eyman Accounting Office Manager Beck Fincher Advertising Manager Kevin Ford Regional Distribution Center Manager Bob Bealert Springfield Distribution Center Manager Randy Freund Regional Field Sales Manager Greg Beck Purchasing 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 David Furr Service Equipment Sales Manager David Glore Ozark Sales Manager Larry Gregory Store Maintenance Manager Mike Hauk Central Division Training Manager Brett Heintz Store Procedures Manager Doy Hensley Store Help Support Manager Larry Boevers Oklahoma City Distribution Center Manager Julie Hibler Corporate Services Manager Tom Bollinger Regional Field Sales Manager Bridget Brashears PC Support Manager John Bush Regional Field Sales Manager Julie Carroll Des Moines Distribution Center Manager Diana Hicks Internal Communications Manager Mark Hoehne Regional Field Sales Manager Lori Holden Customer Service Manager Doug Hopkins Distribution Systems Manager Stan Clingan Regional Field Sales Manager Vicki Hume Corporate Administration/Travel Manager Doug Hutchison Inventory Control Project Manager Steve Jasinski Systems Development Manager Gene Johnson Property Manager David Jordan Kansas City Distribution Center Manager Les Keeth Supplier Credits Manager Julie Langley Finance Controller Steve Lines Sales Training Manager Jeff Main Jobber Systems Sales Manager Ed Martinez Houston Distribution Center Manager David McCready Regional Distribution Center Manager Bryan Mescher Regional Field Sales Manager Brad Oplotnik Systems Networking Manager Steve Phillips Southern Division Regional Loss Prevention Manager Art Rodriguez Regional Field Sales Manager Chuck Rogers Installer Systems Manager Mary Sabor Distribution Center Administrative Services Manager Rick Samsel Inventory Control Manager Joyce Schultz Southern Division Office Manager Tom Seboldt Product Manager Darren Shaw PBE Sales Manager Tim Smith Credit Manager Dwayne Snow Regional Field Sales Manager Paul Stinson Regional Field Sales Manager Mary Stratton Human Resources Records Manager Cliff Tomerlin Regional Field Sales Manager Jeff Watts Regional Field Sales Manager Kathy Prainito Real Estate Contract Administration Manager Larry Wiles A/V Communications Manager Ed Randall Real Estate Acquisition Manager Shari Reaves Benefits Manager Jeanetta Redden Dallas Distribution Center Manager Saundra Wilkinson Store Support Manager Joe Winterberg Product Manager DISTRICT CORPORATE MANAGERS Chuck Avis Emmitt Barina Brad Beckham Steve Beil Tim Brakebill Pat Brown Dan Dowell Tommy Dunn Dallas Engel Ron England Bill Fellows Kirk Frazier Mike Hollis David House Jeff Howard Jeff Jennings B. J. Jones Chad Keel Chris Lewis Rick Lorenzen Kenny Martin Rodger McClary Kevin McCurry Marc McGehee Pernell Peters Marvin Swaim David Pilat Mike Platt Will Reger Alan Riddle Larry Roof Bert Tamez Randy Tanner Rick Tearney Greg Thomas Dallas Thompson Darryl Thompson Mike Chapman Terry Grimmett Butch Kelton Wayne McKinney Juan Salinas David Chavis Rick Hedges Todd Kemper Chris Meade Jim Scott Justin Tracy Ken Coda Kenny Criss Bruce Dowell Gerry Hendrix Perry Hess Brad Hilker Jim Koehn John Krebs Dave Leonhart Curt Miles Ciro Moya Ron Papay Steve Severe Mark Smith Mark Van Hoecke Brett Warstler Brian Stecklein Rob Weiskirch John Wells Allen Wise Dexter Woods Mike Yates Jason York 35 2000 AR S H A R E H O L D E R I N F O R M A T I O N O ’ R E I L L Y A U T O M O T I V E Corporate Address 233 South Patterson Springfield, Missouri 65802 417-862-3333 Web site – www.oreillyauto.com Registrar and Transfer Agent UMB Bank 928 Grand Boulevard Kansas City, Missouri 64141-0064 Inquiries regarding stock transfers, lost certificates or address changes should be directed to UMB Bank at the above address. Independent Auditors Ernst & Young LLP One Kansas City Place Kansas City, Missouri 64105-2143 Legal Counsel Gallop Johnson & Neuman, L.C. 101 South Hanley Road, Suite 1600 St. Louis, Missouri 63105 Skadden, Arps, Slate, Meagher & Flom 333 West Wacker Drive, Suite 2100 Chicago, Illinois 60606 Annual Meeting The annual meeting of shareholders of O’Reilly Automotive, Inc. will be held at 10:00 a.m. local time on May 8, 2001, at the University Plaza Convention Center, 333 John Q. Hammons Parkway in Springfield, Missouri. Shareholders of record as of February 28, 2001, will be entitled to vote at this meeting. Form 10–K Report The Form 10-K Report of O’Reilly Automotive, Inc. filed with the Securities and Exchange Commission and our quarterly press releases are available without charge to shareholders upon written request. These requests and other investor contacts should be directed to James R. Batten, Vice President of Finance/Chief Financial Officer, at the corporate address. 36 2000 AR Trading Symbol The Company’s common stock is traded on The Nasdaq Stock Market (National Market) under the symbol ORLY. Number of Shareholders As of February 28, 2001, O’Reilly Automotive, Inc. had approximately 19,500 shareholders based on the number of holders of record and an estimate of the number of individual participants represented by security position listings. Analyst Coverage The following analysts provide research coverage of O’Reilly Automotive, Inc. Credit Suisse First Boston – Gary Balter William Blair & Co. – Ellen Baras A.G. Edwards – Mark Johnson Merrill Lynch – Douglas Neviera Advest – Brett Jordan Smith Moore & Co. – John Rast 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. First Quarter Second Quarter Third Quarter Fourth Quarter For the Year 2000 1999 High Low High Low $ 221⁄8 $ 81⁄4 $ 263⁄8 $ 125⁄8 157⁄16 161⁄8 271⁄4 271⁄4 113⁄4 131⁄ 8 14 81⁄4 253⁄4 275⁄16 243⁄8 275⁄16 20 177⁄8 197⁄16 177⁄8 . 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 l a F : n g i s e D (cid:0) 10769_Covers 3/29/01 9:32 AM Page 2 O ’ R E I L L Y A U T O M O T I V E 2 0 0 0 A N N U A L R E P O R T F I N A N C I A L H I G H L I G H T S (In thousands, except per share and operating data) Years ended December 31, 2000 1999 Percent Change Operations Product sales Operating income Net income Financial position Working capital Total assets Long-term debt Shareholders’ equity Net income per common share (diluted) Weighted average common $ 890,421 $ 754,122 90,029 51,708 76,920 45,639 $ 296,272 $ 249,351 715,995 90,463 463,731 610,442 90,704 403,044 18.1% 17.0% 13.3% 18.8% 17.3% – 15.1% $ 1.00 $ 0.92 8.7% shares outstanding (assuming dilution) 51,728 49,715 4.0% Operating data Stores at year end Same-store sales gain 672 4.0% 571 9.6% 17.7% -5.6% T A B L E O F C O N T E N T S O’Reilly Leadership – Charged . . . . . . . . . . . .page 4–5 Team O’Reilly – Revved . . . . . . . . . . . . . . . . .page 6–7 Dual Market Strategy – Fueled . . . . . . . . . . .page 8–9 Distribution – Geared . . . . . . . . . . . . . . . . . . .page 10–11 Financial Information Selected Consolidated Financial Data . . . . . . . .page 13 Management’s Discussion and Analysis . . . . . .page 15 Consolidated Financial Statements . . . . . . . . . .page 20 Notes to Consolidated Financial Statements . . .page 24 Report of Independent Auditors . . . . . . . . . . . .page 33 Directors and Management . . . . . . . . . . . . . . .page 34 Shareholder Information . . . . . . . . . . . . . . . . .page 36 Certain statements contained in this document are forward-looking statements. the economy in general, inflation, consumer debt levels, governmental approvals, our These statements discuss, among other things, expected growth, store development ability to hire and retain qualified employees and the weather. Actual results may and expansion strategy, business strategies, future revenues and future performance. materially differ from anticipated results described in these forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions, Please refer to the Risk Factors sections of the Company’s Form 10-K for the year including, but not limited to, competition, product demand, the market for auto parts, ended December 31, 2000, for more details. 10769_Covers 3/29/01 9:32 AM Page 1 O ’ R E I L L Y A U T O M O T I V E 2 0 0 0 A N N U A L R E P O R T O ’ R E I L L Y A U T O M O T I V E | 2 0 0 0 A N N U A L R E P O R T | D R I V E N 233 South Patterson Springfield, Missouri 65802 417-862-3333 www.oreillyauto.com 

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