O’Reilly Automotive
Annual Report 2002

Plain-text annual report

driven by demand O ’ R E I L LY A U T O M O T I V E 2 0 0 2 A N N U A L R E P O R T Our gr owth strategies ar e per fectly aligned with the needs of the automotive industr y. Our operating strategies give us the competitive advantage. Our cultur e is the key to our gr owth. 2 0 0 2 A n n u a l R e p o r t 1 O U R I N D U S T R Y D R I V E S demand T H E R E A R E O V E R 2 1 6 , 0 0 0 , 0 0 0 V E H I C L E S O N T H E R O A D T O D AY … V E H I C L E S O N T H E R O A D (in millions) A V E R A G E A G E O F V E H I C L E S O N T H E R O A D (in years) 3 3 9 9 1 1 6 6 9 9 1 1 8 8 0 0 2 2 2 2 1 1 2 2 6 1 2 0 0 5 5 . . 8 8 0 0 7 7 . . 8 8 0 0 8 8 . . 8 8 5 5 7 7 . . 8 8 0 9 . 8 M I L E S D R I V E N (in billions) 0 0 6 6 5 5 , , 2 2 5 5 2 2 6 6 , , 2 2 1 1 9 9 6 6 , , 2 2 0 0 5 5 7 7 , , 2 2 8 7 7 , 2 7 7 9 9 9 9 1 1 8 8 9 9 9 9 1 1 9 9 9 9 9 9 1 1 0 0 0 0 0 0 2 2 1 0 0 2 7 7 9 9 9 9 1 1 8 8 9 9 9 9 1 1 9 9 9 9 9 9 1 1 0 0 0 0 0 0 2 2 1 0 0 2 7 7 9 9 9 9 1 1 8 8 9 9 9 9 1 1 9 9 9 9 9 9 1 1 0 0 0 0 0 0 2 2 1 0 0 2 The number of vehicles continue to grow at a steady pace, with an increasing emphasis on light trucks (SUVs). Consumers are choosing to maintain vehicles longer to satisfy their driving demands. Miles driven continue to grow due to increases in the number of licensed drivers, vehicles on the road and a growing popularity for road travel. O U R I N D U S T R Y AGE OF AUTO FLEET NOW 8.9 YEARS MILES DRIVEN 2.8 TRILLION INCREASE IN SUV AND LIGHT TRUCK POPULATION OVER 216 MILLION VEHICLES REGISTERED MORE CARS IN PRIME REPAIR AGE X X X X X 2 0 0 2 A n n u a l R e p o r t 1 D E M A N D D R I V E S results In thousands, except earnings per share data and operating data F I N A N C I A L H I G H L I G H T S Year ended December 31 2002 2001 2000 1999 1998 Product Sales Operating Income Net Income Working Capital Total Assets Long-Term Debt Shareholders' Equity Net Income Per Common $ 1,312,490 $ 1,092,112 $ 890,421 $ 754,122 $ 616,302 138,301 113,831 81,992 66,352 90,029 51,708 76,920 45,639 56,901 30,772 483,623 429,527 296,272 249,351 208,363 1,009,419 856,859 715,995 610,442 493,288 190,470 650,524 165,618 90,463 90,704 170,166 556,291 463,731 403,044 218,394 Share (assuming dilution) 1.53 1.26 1.00 0.92 0.71 Weighted-Average Common Shares Outstanding (assuming dilution) Stores At Year-End Same-Store Sales Gain 53,692 52,786 51,728 49,715 43,204 981 3.1% 875 8.2% 672 4.0% 571 9.6% 491 6.8% Team O'Reilly is committed to capitalizing on the demand for auto parts and accessories. Our 2-4-Your Future initiative, representing our goal to reach $2 billion in sales per year by December 31, 2005, demonstrates this commitment. E A R N I N G S P E R S H A R E (assuming dilution) N U M B E R S O F S T O R E S P R O D U C T S A L E S (in billions) 1 7 . 0 $ 2 9 . 0 $ 0 0 . 1 $ 6 2 . 1 $ 3 5 . 1 $ 1 9 4 1 7 5 2 7 6 5 7 8 1 8 9 2 6 . 0 $ 5 7 . 0 $ 9 8 . 0 $ 9 0 . 1 $ 1 3 . 1 $ 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 Our 10-year compound average growth rate in earnings per share is 21.4% We continue adding to our store count with new stores and acquisitions, including plans for 130 new stores in 2003. Our plans are to grow sales 18-20% per year. 2 0 0 2 A n n u a l R e p o r t 3 OUR GROWTH STRATEGY INCLUDES AGGRESSIVELY OPENING STORES AND FURTHER DEVELOPING & growth OVER THE PAST 45 YEARS, O'REILLY HAS EXPERIENCED TREMENDOUS GROWTH IN ALL AREAS. WE CURRENTLY HAVE NINE HIGH-TECH DISTRIBUTION CENTERS, 981 STORES OVER THE EXPANSE OF 16 CONTIGUOUS STATES, AND SALES IN EXCESS OF $1.3 BILLION. AMERICANS ARE OWNING MORE VEHICLES, DRIVING MORE MILES AND HOLDING ON TO THEIR VEHICLES LONGER THAN EVER BEFORE. TEAM O'REILLY IS WELL POSITIONED TO CAPITALIZE ON THESE STRONG INDUSTRY TRENDS. O U R U N I Q U E S T O R E D E S I G N Although differing in some physical detail, each store emphasizes a bright appearance and attractive merchandise presentation. All stores start with a consistent “plan-o-grammed” merchandise presentation, with changes to reflect local tastes. So whether shopping in Nebraska or Alabama, our customers will feel at home and find what they need at O’Reilly. 981 STORES 9 DISTRIBUTION CENTERS OVER 14,000 TEAM MEMBERS Each O'Reilly store is clean, well-lighted and conveniently located. But, more important, is having the right parts available for our customers at a price that represents true value. A fleet of 81 heavy trucks, 91 tractors and 119 trailers average almost 1,200,000 miles per month to provide overnight delivery of over 100,000 items to all 981 O’Reilly stores. The key to O'Reilly's success is the enthusiastic, professional members of Team O'Reilly, who provide our customers with the best possible service every day. OUR TEAM MEMBERS, BECAUSE WE KNOW THEY ARE THE KEY TO OUR SUCCESS. IOWA 63 STORES Des Moines Kansas City MISSOURI 130 STORES Springfield Little Rock ARKANSAS 67 STORES LOUISIANA 47 STORES NEBRASKA 24 STORES KANSAS 55 STORES OKLAHOMA 99 STORES Oklahoma City Dallas TEXAS 363 STORES Houston D I S T R I B U T I O N C E N T E R ILLINOIS 10 STORES INDIANA 5 STORES KENTUCKY 11 STORES Nashville TENNESSEE 61 STORES Knoxville MISSISSIPPI 16 STORES ALABAMA 18 STORES GEORGIA 8 STORES FLORIDA 4 STORES S DELIVERY EXPENSE CONTROL TOP AUTOMOTIVE BRANDS O’Reilly’s fleet of 2,927 light trucks provide fast “hotshot” delivery of parts to our commercial customers. A common phrase around O'Reilly is, “if you watch your pennies, the dollars will take care of themselves.” All team mem- bers are involved in controlling expenses and know that it takes $18 in sales to make up for only $1 of wasted expense. To meet the varying needs of our customers, O'Reilly carries nationally advertised brands as well as high-quality, proprietary brands, many of which are backed by a lifetime warranty. W E AT O ’ R E I L LY A U T O M O T I V E U N D E R S TA N D W H AT I T TA K E S T O M E E T T H E S E I N D U S T R Y D E M A N D S . O U R C O M P E T I T I V E A D VA N TA G E S A R E D R I V E N B Y O U R C U LT U R E . C o m p e t i t i v e A d v a n t a g e : S T R AT E G I C D I S T R I B U T I O N S Y S T E M S O u r p r o m i s e i s t o h a v e t h e r i g h t p a r t f o r t h e r i g h t p r i c e a t t h e r i g h t t i m e f o r a l l o f o u r c u s t o m e r s . O ’ R E I L LY C U LT U R E Our cultur e defines who we ar e and is driven by our superior customer ser vice. C o m p e t i t i v e A d v a n t a g e : D U A L M A R K E T S T R AT E G Y C o m p e t i t i v e A d v a n t a g e : T E A M O ’ R E I L LY O u r b a l a n c e d a p p r o a c h t o s e r v i c i n g b o t h d o - i t - y o u r s e l f e r s a n d p r o f e s s i o n a l i n s t a l l e r s allows us gr eater market penetration. O u r t e a m o f p r o f e s s i o n a l p a r t s p e o p l e a r e t e c h n i c a l l y p r o f i c i e n t a n d p r o v i d e e x p e r t a s s i s t a n c e t o o u r c u s t o m e r s . O ’ R E I L LY C U LT U R E is mor e than just a slogan introduced to our team members on the first day of orientation. Respect, honesty, teamwork, expense control, har d work, pr ofessionalism, enthusiasm, excellent customer ser vice, dedication and a win-win attitude ar e values that our team embraces. Our team knows that to r each our 2-4-Your Futur e goal, it will take ever y team member giving their best in ever y aspect of the O’Reilly way. 6 O ’ R e i l l y A u t o m o t i v e L E T T E R T O O U R S H A R E H O L D E R S In 1957 C.F. and Chub O’Reilly opened the first O’Reilly Auto Parts store in Springfield, Mo. With the help of 10 original team members, first year sales were $700,000. Now, 45 years later, O’Reilly Auto Parts has nearly 1,000 stores in 16 states, over 14,000 team members and overnight service on over 100,000 inventory items from nine distribution centers. Over the years much has changed, but the O’Reilly Culture remains the same. Excellent customer service from our professional parts people, our dual market strategy, broad inventory coverage and strategic distribution systems are the key components to our competitive advantage. We have worked very hard this year to reach our goals. We opened 106 new stores, increasing our store count to 981 in 16 contiguous states. We broke ground on our 10th distribution center in Saraland, Alabama, which is scheduled to open in mid-2003. This facility will allow expansion in the former Mid-State market areas. Financial performance remained strong in 2002 with product sales of $1.31 billion, a 20.2% increase, a 10.6% operating margin and net income growth of 23.6%. After reaching our goal of $1 billion in sales a year ahead of schedule in 2001, we now have our sights set on $2 billion. “Two Four Your Future” (2-4 Your Future) is our slogan for reaching $2 billion in sales within the next four years. Achieving this goal will provide further growth and opportunity for our team members and shareholders. This goal is challenging, yet attainable with a strong commitment and focus from Team O’Reilly. We look forward to 2003 with enthusiasm. We will continue to run our business with integrity and honesty as we have since 1957. The values of the O’Reilly Culture will guide us through the coming years. Thanks to all of our customers, shareholders and team members for your continued confidence and support. D AV I D O ’ R E I L LY C H I E F E X E C U T I V E O F F I C E R & C O - C H A I R M A N O F T H E B O A R D L A R R Y O ’ R E I L LY C H I E F O P E R AT I N G O F F I C E R & C O - C H A I R M A N O F T H E B O A R D T E D F. W I S E C O - P R E S I D E N T G R E G H E N S L E E C O - P R E S I D E N T 2 0 0 2 A n n u a l R e p o r t 7 O ’ R E I L LY C O M P E T I T I V E A D VA N TA G E S S T R AT E G I C D I S T R I B U T I O N S Y S T E M S Guaranteeing our customer the right part for the right price at the right time is more than just our slogan, it’s our promise. Every member of Team O’Reilly strives to ensure that every customer who enters an O’Reilly store receives the best customer service available anywhere. Each of our stores carries an average of 22,000 stock keeping units (SKUs), more than our competitors. Our enhanced inventory management system links every store to our nine distribution centers. Transactions are recorded within each store and as inventory is sold, the inventory management system places an order at the distribution center for the product to be replenished that night. Our global inventory system allows our stores to view and order from the inventory of other stores and distribution centers, which reduces our overall inventory. Our advanced supply chain system has allowed us to customize the merchandise we stock at each store. The “global” inventory system has allowed us to bring $20 million of overstocked, store merchandise back to the distribution centers since its implementation in June 2001, minimizing our inventory investment and maximizing our return on assets. Our distribution centers are strategically located in Little Rock, Arkansas; Des Moines, Iowa; Kansas City and Springfield, Missouri; Oklahoma City, Oklahoma; Knoxville and Nashville, Tennessee; and Houston and Dallas, Texas. Combined, these nine distribution centers contain 1,945,690 square feet of warehouse space and house over 100,000 unique SKUs. This unparalleled availability of broad inventory and overnight delivery gives our customers quick access to those hard to find parts. D U A L M A R K E T S T R AT E G Y Keeping a successful balance between servicing do-it-yourself (DIY) and professional installer customers is a difficult challenge, as many of our competitors have come to realize. But that doesn’t stop us from continuing to focus on our goal of a 50/50 blend of professional installer and DIY customers to allow greater market penetration. 8 O ’ R e i l l y A u t o m o t i v e Our professional installer customers recognize the advantage of our broad inventory availability, special pricing, knowledgeable store staff and fast delivery service. Over 174 full-time sales specialists devote their time to the needs of our professional installer customers to ensure that they are up to date with the latest products, tools and equipment to meet the needs of their businesses. Our DIY customers have grown to trust and rely on the quality and service that they receive from our professional parts people. Not only are O’Reilly stores conveniently located and provide a large inventory with a low-price guarantee, but our team members provide friendly assistance, service and solutions to our customers’ automotive needs. Our customers get quality parts and quality service, before and after the sale at O’Reilly. T E A M O ’ R E I L LY All of the successes of 2002 are directly attributable to our team members. Over 14,000 motivated and dedicated store, distribution center and management team members give O’Reilly Automotive an overwhelming advantage over the competition. Every team member is exposed to the 10 values of the O’Reilly Culture: respect, honesty, teamwork, expense control, hard work, professionalism, enthusiasm, excellent customer service, dedication and a win-win attitude from the first day of orientation, where they are instilled in them to be carried day to day. Whether it is packing trucks on the shipping dock or testing a battery for a valued customer, it takes hard work from every O’Reilly team member to keep our customers coming back. Ongoing training and continuing education up to ASE certification ensure that our team members are up to date with new developments and changes in automotive technology. This extensive training and commitment to the O’Reilly Culture is what makes our team members “Professional Parts People.” 2 0 0 2 A n n u a l R e p o r t 9 C O M P E T I T I V E A D V A N T A G E : strategic distribution systems O’Reilly meets the demands of our customers with a sophisticated point-of-sale system allowing stores to order even hard-to-find parts directly from one of our nine distribution centers. Parts are shipped and delivered daily to all of our stores. 2 0 0 2 A n n u a l R e p o r t 11 C O M P E T I T I V E A D V A N T A G E : dual market strategy O’Reilly successfully balances serving both professional installers and do-it-yourself customers. This strategy allows for greater market penetration in the areas that we serve and provides unparalleled access to a broad range of parts. 2 0 0 2 A n n u a l R e p o r t 13 C O M P E T I T I V E A D V A N T A G E : team o’reilly O’Reilly team members are among the most dedicated in the industry, continually focusing on customer service and taking pride in a job well done. 2 0 0 2 A n n u a l R e p o r t 15 driven by service A M O T I VAT E D , C U S T O M E R - F O C U S E D T E A M Customer ser vice is mor e than just meeting the basic needs of our c u s t o m e r s , i t ' s a b o u t g o i n g t h e e x t r a m i l e . T h i s i s w h y o u r t e a m strives for per fection in every area: competitive prices, fully stocked shelves, friendly team members, br oad inventor y availability, and a clean and conveniently located stor e. Our commitment to ser vice goes beyond the stor e walls and day-to-day business into the community, building lasting personal r elationships as well. We ar e or dinar y people doing extraor dinar y things. 16 O ’ R e i l l y A u t o m o t i v e 2 0 0 2 A n n u a l R e p o r t 17 18 O ’ R e i l l y A u t o m o t i v e 2 0 0 2 A n n u a l R e p o r t 21 22 O ’ R e i l l y A u t o m o t i v e 2 0 0 2 financial results P O S I T I O N E D F O R G R O W T H O'Reilly is well-positioned to capitalize on str ong industr y tr ends. Our stor e expansion plans call for 130 new new stor es in 2003, located primarily within the new markets r elating to the Mid-State acquisition in 2001. These expansion plans ar e suppor ted by a str ong balance sheet and ver y dedicated team members. We also continue to focus on operating impr ovements and ar e r elentless about expense contr ol. WHERE THERE IS DEMAND, TEAM O'REILLY WILL BE THERE! 2 0 0 2 A n n u a l R e p o r t 25 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 (In thousands, except per share data and selected operating data) Y E A R S E N D E D D E C E M B E R 3 1 , 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 Income from discontinued operations Net income BASIC EARNINGS PER COMMON SHARE: Income per share from continuing operations Income per share from discontinued operations Net income per share Weighted-average common shares outstanding EARNINGS PER COMMON SHARE – ASSUMING DILUTION: Income per share from continuing operations Income per share from discontinued operations Net income per share Weighted-average common shares outstanding – adjusted SELECTED OPERATING DATA: Number of stores at year-end(a) Total store square footage at year-end (in 000’s)(a)(b) Weighted-average product sales per store (in 000’s)(a)(b) Weighted-average product sales per square foot(b)(e) Percentage increase in same-store product sales open two full periods(c) Percentage increase in same-store product sales open one year(b) BALANCE SHEET DATA: Working capital Total assets Short-term debt Long-term debt, less current portion Shareholders’ equity 2 0 0 2 2 0 0 1 2 0 0 0 $1,312,490 759,090 $1,092,112 624,294 $ 890,421 507,720 553,400 415,099 138,301 (7,319) 48,990 81,992 — 467,818 353,987 113,831 (7,104) 40,375 66,352 — 382,701 292,672 90,029 (6,870) 31,451 51,708 — $ 81,992 $ 66,352 $ 51,708 $ $ $ $ $ $ 1.54 — 1.54 53,114 1.53 — 1.53 53,692 981 6,617 1,415 210.70 $ $ $ $ $ $ 1.27 — 1.27 52,121 1.26 — 1.26 52,786 875 5,882 1,425 213.00 $ $ $ $ $ $ 1.01 — 1.01 51,168 1.00 — 1.00 51,728 672 4,491 1,412 212.60 3.1% 3.7% 8.2% 8.8% 4.0% 5.0% $ 483,623 1,009,419 682 190,470 650,524 $ 429,527 856,859 16,843 165,618 556,291 $ 296,272 715,995 49,121 90,463 463,731 (a) Store count for 2002 does not include 27 stores acquired from Dick Smith Enterprises and Davie Automotive, Inc. in December 2002. (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 com- pared. 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) 1998 does not include stores acquired from Hi/LO. Consolidated weighted-average product sales per square foot were $207.30. 26 O ’ R e i l l y A u t o m o t i v e 1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 5 1 9 9 4 1 9 9 3 $ 754,122 428,832 $ 616,302 358,439 $ 316,399 181,789 $ 259,243 150,772 $ 201,492 116,768 $ 167,057 97,758 $ 137,164 82,102 325,290 248,370 76,920 (3,896) 27,385 45,639 — 257,863 200,962 56,901 (6,958) 19,171 30,772 — 134,610 97,526 37,084 472 14,413 23,143 — 108,471 79,620 28,851 1,182 11,062 18,971 — 84,724 62,687 22,037 236 8,182 14,091 — 69,299 52,142 17,157 376 6,461 11,072 — $ 45,639 $ 30,772 $ 23,143 $ 18,971 $ 14,091 $ 11,072 $ $ $ $ $ $ 0.94 — 0.94 48,674 0.92 — 0.92 49,715 571 3,777 1,423 216.50 $ $ $ $ $ $ 0.72 — 0.72 42,476 0.71 — 0.71 43,204 491 3,172 1,368 238.00 9.6% 6.8% $ 249,351 610,442 19,358 90,704 403,044 $ 208,363 493,288 13,691 170,166 218,394 $ $ $ $ $ $ $ 0.55 — 0.55 42,086 0.54 — 0.54 42,554 259 1,454 1,306 235.80 6.8% 93,763 247,617 130 22,641 182,039 $ $ $ $ $ $ $ 0.45 — 0.45 41,728 0.45 — 0.45 42,064 219 1,155 1,239 242.20 14.4% 74,403 183,623 3,154 237 155,782 $ $ $ $ $ $ $ 0.40 — 0.40 35,640 0.39 — 0.39 35,804 188 923 1,101 227.30 8.9% 80,471 153,604 231 358 133,870 $ $ $ $ $ $ $ 0.32 — 0.32 34,620 0.32 — 0.32 34,778 165 785 1,007 215.40 8.9% 41,416 87,327 311 461 70,224 55,062 42,492 12,570 216 4,556 8,230 48 8,278 0.25 — 0.25 32,940 0.25 — 0.25 33,046 145 671 949 208.70 14.9% 41,193 73,112 495 732 57,805 $ $ $ $ $ $ $ $ 2 0 0 2 A n n u a l R e p o r t 27 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 The following discussion of our financial condition, results of operations and liquidity and capital resources should be read in conjunction with our Consolidated Financial Statements, related notes and other financial information included elsewhere in this annual report. We are one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling our products to both do-it-yourself (“DIY”) customers and professional installers. Our stores carry an extensive product line consisting of new and remanufactured automotive hard parts, maintenance items and accessories, and a complete line of auto body paint and related materials, automotive tools and professional service equipment. Beginning in January 2000, we calculate same-store product sales based on the change in product sales for stores open at least one year. We also calculate same-store product sales based on the change in product sales of only those stores open during both full periods being compared. We calculate the percentage increase in both same- store product sales based on store sales results, which exclude sales of specialty machinery, sales by outside salesmen and sales to employees. Cost of goods sold consists primarily of product costs and warehouse and distribution expenses. Cost of goods sold as a percentage of product sales may be affected by variations in our product mix, price changes in response to competitive factors and fluctuations in merchandise costs and vendor programs. Operating, selling, general and administrative expenses consist primarily of store payroll, store occupancy, adver- tising expenses, other store expenses and general and administrative expenses, including salaries and related benefits of corporate team members, administrative office occupancy expenses, data processing, professional expenses and other related expenses. DISCLOSURE AND INTERNAL CONTROL Our chief executive officer and chief financial officer have reviewed and evaluated the Company’s disclosure controls and procedures as of December 31, 2002. Based on such review and evaluation, the officers believe that the disclosure con- trols and procedures are designed effectively to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, (i) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and that the information required to be discussed by the Company in the reports that it files and submits under the Securities Exchange Act of 1934, as amended, and (ii) is documented and communicated to the Company’s management, including the officers, as appropri- ate to allow timely decisions regarding required disclosure. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, includ- ing any corrective actions with regard to significant deficiencies and material weaknesses. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The fundamental objective of financial reporting is to provide useful information that allows a reader to comprehend the business activities of our Company. To aid in that understanding, management has identified our “critical accounting poli- cies.” These policies have the potential to have a more significant impact on our financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature. Cost of Goods Sold – Cost of goods sold includes estimates of shortages that are adjusted upon physical inven- tory counts in subsequent periods and estimates of amounts due from vendors for certain merchandise allowances and rebates. These estimates are consistent with historical experience. Operating, Selling, General and Administrative Expense (“OSG&A”) – Operating, selling, general and administra- tive expense includes estimates for worker’s compensation and other general liability obligations, which are partially based on estimates of certain claim costs and historical experience. Credit Operations – Allowance for doubtful accounts is estimated based on historical loss ratios and consistently have been within management’s expectations. Revenue – We recognize sales upon shipment of the products. Stock-based Compensation – We have elected to use the intrinsic value method of accounting for stock options issued under our stock option plans and accordingly do not record an expense for such stock options. For purposes of pro forma disclosures under the fair value method, the estimated fair value of the options is amortized to expense over the options’ vesting period. 28 O ’ R e i l l y A u t o m o t i v e 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 ( c o n t i n u e d ) Our pro forma information for the years ended December 31, is as follows: (in thousands, except per share data) Net income as reported Stock-based compensation expense as reported Stock-based compensation expense under fair value method Pro forma net income Pro forma basic net income per share Pro forma net income per share – assuming dilution 2 0 0 2 2 0 0 1 2 0 0 0 $81,992 $66,352 $51,708 — 7,217 — 5,406 — 3,531 $74,775 $60,946 $48,177 $ 1.41 $ 1.17 $ 0.94 $ 1.39 $ 1.15 $ 0.93 RESULTS OF OPERATIONS The following table sets forth certain income statement data as a percentage of product sales for the years indicated: Y E A R S E N D E D D E C E M B E R 3 1 , 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 2 0 0 2 2 0 0 1 2 0 0 0 100.0% 57.8 100.0% 57.2 100.0% 57.0 42.2 31.6 10.6 (0.6) 10.0 3.7 6.3% 42.8 32.4 10.4 (0.6) 9.8 3.7 6.1% 43.0 32.9 10.1 (0.8) 9.3 3.5 5.8% 2002 COMPARED TO 2001 Product sales increased $220.4 million, or 20.2% from $1.09 billion in 2001 to $1.31 billion in 2002, due to 106 net additional stores opened during 2002 and a 3.7% increase in same-store product sales for stores open at least one year. We believe that the increased product sales achieved by the existing stores are the result of our offering of a broader selection of products in most stores, an increased promotional and advertising effort through a variety of media and localized promotional events, and continued improvement in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to increased sales. Gross profit increased 18.3% from $467.8 million (or 42.8% of product sales) in 2001 to $553.4 million (or 42.2% of product sales) in 2002. The increase in gross profit dollars is primarily due to increases in sales. The decrease in gross profit as a percent of product sales is primarily due to increased sales to independent jobbers, which are at a lower gross margin, and increased distribution costs at the distribution centers acquired from Mid-State Automotive Distributors, Inc. Operating, selling, general and administrative expenses increased $61.1 million from $354.0 million (or 32.4% of product sales) in 2001 to $415.1 million (or 31.6% of product sales) in 2002. The increase in these expenses in dollar amount was primarily attributable to increased salaries and benefits, rent and other costs associated with the addition of employees and facilities to support the increased level of our operations. The decrease in OSG&A expenses as a percent of product sales was primarily due to reductions in payroll, benefits and other OSG&A expenses through man- agement’s expense control initiatives. Other expense, net, increased by $215,000 from $7.1 million in 2001 to $7.3 million in 2002. The increase was primarily due to interest expense on increased borrowings under our credit facility and a decrease in interest income. Provision for income taxes increased from $40.4 million in 2001 (37.8% effective tax rate) to $49.0 million in 2002 (37.4% effective tax rate). The increase in the dollar amount was primarily due to the increase of income before income taxes. The decrease in the effective rate was primarily due to changes in the mix of business between the states in which we operate. Principally as a result of the foregoing, net income in 2002 was $82.0 million (or 6.3% of product sales), an increase of $15.6 million (or 23.6% of product sales) from net income in 2001 of $66.4 million (or 6.1% of product sales). 2 0 0 2 A n n u a l R e p o r t 29 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 ( c o n t i n u e d ) 2001 COMPARED TO 2000 Product sales increased $201.7 million, or 22.7% from $890.4 million in 2000 to $1.09 billion in 2001, primarily due to 121 net additional stores opened during 2001 and an 8.8% increase in same-store product sales for stores open at least one year. We believe that the increased product sales achieved by the existing stores are the result of our offering of a broader selection of products in most stores, an increased promotional and advertising effort through a variety of media and localized promotional events, and continued improvement in the merchandising and store layouts of most stores. Also, our continued focus on serving professional installers contributed to increased sales. Gross profit increased 22.2% from $382.7 million (or 43.0% of product sales) in 2000 to $467.8 million (or 42.8% of product sales) in 2001. Operating, selling, general and administrative expenses increased $61.3 million from $292.7 million (or 32.9% of product sales) in 2000 to $354.0 million (or 32.4% of product sales) in 2001. The increase 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 $234,000 from $6.9 million in 2000 to $7.1 million in 2001. The increase was primarily due to interest expense on increased debt levels related to the issuing of $100 million of senior notes, partially offset by lower interest expense on borrowings under the revolving credit facility due to lower interest rates. Provision for income taxes increased from $31.5 million in 2000 (37.8% effective tax rate) to $40.4 million in 2001 (37.8% effective tax rate). The increase in the dollar amount was due to the increase of income before income taxes. Principally as a result of the foregoing, net income in 2001 was $66.4 million (or 6.1% of product sales), an increase of $14.6 million (or 28.3% of product sales) from net income in 2000 of $51.7 million (or 5.8% of product sales). LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $104.5 million in 2002, $50.0 million in 2001 and $5.8 million in 2000. The increase in cash provided by operating activities in 2002 compared to 2001 is primarily due to increases in net income, accounts payable, income taxes payable, accrued payroll and accrued benefits and withholdings, partially off- set by increases in receivables and inventory. The increase in cash provided by operating activities in 2001 compared to 2000 is largely the result of smaller increases in inventory, increased net income and, to a lesser extent, increased accrued benefits and withholdings. This increase in cash provided by operating activities in 2001 compared to 2000 was partially offset by the increase in amounts receivable from vendors and a decrease in accounts payable and other current liabilities. Net cash used in investing activities was $105.4 million in 2002, $77.8 million in 2001 and $40.5 million in 2000. The increase in cash used in investing activities in 2002 was primarily due to increased purchases of property and equipment. The increase in cash used in investing activities in 2001 was largely due to the purchase of Mid-State, as discussed in Note 2 of the Consolidated Financial Statements, and a significant reduction in the amount of proceeds received from the sale of property and equipment. On December 15, 2000, we entered into a $50 million Synthetic Operating Lease Facility (“the Facility”) with a group of financial institutions. Under the Facility, the Lessor generally 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. We subsequently leases the property from the Lessor for an initial term through December 15, 2005, and has an option to request two additional successive renewal periods of five years each. The Facility provides for a residual value guarantee of $41.7 million at December 31, 2002, and purchase options on the properties. It also contains provisions for an event of default whereby the Lessor, among other things, may require us to purchase any or all of the properties. We are utilizing the Facility to finance a portion of its store growth. Funding under the Facility at December 31, 2002, and 2001, totaled $49.0 million and $43.0 million, respectively. Future minimum rental commitments under the Facility have been included in the table of future minimum annual rental commitments below. Our lessor under the Facility acts as lessor to numerous other lessees under similar synthetic lease arrangements and has no other operations. Our maximum loss under its Facility is limited to its $41.7 million residual value guarantee and none of our assets have been pledged as collateral for the Lessor’s obligations. 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 10-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 former revolving credit facility. On May 16, 2001, we completed a $100 million private placement of two series of unsecured senior notes (“Senior Notes”). The Series 2001-A Senior Notes were issued for $75 million, are due May 16, 2006, and bear interest at 7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are due May 16, 2008, and bear interest at 7.92% per year. The private placement agreement allows for a total of $200 million of Senior Notes issuable in series and is guaranteed by all of our subsidiaries. Proceeds from the transaction were used to reduce outstanding borrowings under our former revolving credit facility. 30 O ’ R e i l l y A u t o m o t i v e 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 ( c o n t i n u e d ) In August, 2001, we completed a sale-leaseback with O’Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company). The transaction closed on September 1, 2001, with a purchase price of approximately $5.6 million for nine O’Reilly Auto Parts stores and did not result in a material gain or loss. The lease, which has been accounted for as an operating lease, calls for an initial term of 15 years with three five-year renewal options. Capital expenditures were $102.3 million in 2002, $68.5 million in 2001 and $82.0 million in 2000. These expenditures were primarily related to the opening of new stores, as well as the relocation or remodeling of existing stores. We either opened or acquired 106, 203 and 101 net stores in 2002, 2001 and 2000, respectively. Eighteen net, additional stores were acquired in December 2002, and will be included in 2003 as new stores. We remodeled or relocated 27 stores in 2002, 16 stores in 2001 and 8 stores in 2000. Three new distribution centers were acquired; two in October 2001, located in Nashville, Tennessee and Knoxville, Tennessee, and one in October 2000, located in Little Rock, Arkansas. 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. On July 29, 2002, we completed an unsecured, three-year syndicated credit facility (the “Credit Facility”) in the amount of $150 million led by Wells Fargo Bank as the Administrative Agent replacing a five-year syndicated credit facility. The Credit Facility is guaranteed by all of our subsidiaries and may be increased to a total of $200 million, subject to availability of such additional credit from either existing banks within the Credit Facility or other banks. The Credit Facility bears interest at LIBOR plus .875% (2.26% at December 31, 2002) and expires in July 2005. At December 31, 2002, $90,000,000 of the Credit Facility was outstanding. At December 31, 2001, we had available an unsecured credit facility providing for maximum borrowings of $140 million. The facility was comprised of a revolving credit facility of $125 million, and a term loan of $15 million. At December 31, 2001, $61,350,000 of the revolving credit facility and $15 million of the term loan was outstanding. The credit facility, which bore interest at LIBOR plus 0.50%, expired in January 2003. All borrowings outstanding under the old credit facility at December 31, 2001, were fully repaid in 2002. Our contractual obligations, including commitments for future payments under non-cancelable lease arrangements and short- and long-term debt arrangements, are summarized below and are fully disclosed in Notes 6 and 7 to the Consolidated Financial Statements. (in thousands) PAY M E N T S D U E B Y P E R I O D Contractual Obligations: Notes payable Long-term debt Capital lease obligations Operating leases Unconditional purchase commitments L E S S T H A N T O TA L 1 Y E A R 2 - 3 Y E A R S 4 - 5 A F T E R 5 Y E A R S Y E A R S $ 95 $ 190,076 981 252,301 41,094 78 $ 12 592 29,882 41,094 17 $ — $ 90,027 389 51,346 — 75,033 — 39,004 — — 25,004 — 132,069 — Total contractual cash obligations $484,547 $ 71,658 $141,779 $114,037 $157,073 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. 2 0 0 2 A n n u a l R e p o r t 31 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 ( c o n t i n u e d ) QUARTERLY RESULTS The following table sets forth certain quarterly unaudited operating data for fiscal 2002 and 2001. 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) Product sales Gross profit Operating income Net income Basic net income per common share Net income per common share – assuming dilution (in thousands, except per share data) Product sales Gross profit Operating income Net income Basic net income per common share Net income per common share – assuming dilution F I R S T S E C O N D T H I R D F O U R T H Q U A R T E R Q U A R T E R Q U A R T E R Q U A R T E R F I S C A L 2 0 0 2 126,028 28,638 144,186 37,769 $295,489 $343,181 $359,579 $314,241 130,990 31,171 $ 16,642 $ 22,547 $ 24,096 $ 18,707 $ 0.31 $ 0.42 $ 0.45 $ 0.35 $ 0.31 $ 0.42 $ 0.45 $ 0.35 152,196 40,723 F I R S T S E C O N D T H I R D F O U R T H Q U A R T E R Q U A R T E R Q U A R T E R Q U A R T E R F I S C A L 2 0 0 1 117,789 30,758 102,426 21,732 $239,063 $280,676 $293,996 $278,377 122,316 27,199 $ 12,317 $ 17,987 $ 20,140 $ 15,908 0.30 $ 0.30 $ 125,287 34,142 0.38 $ 0.38 $ 0.24 $ 0.24 $ 0.35 $ 0.34 $ SHAREHOLDER RIGHTS PLAN On May 17, 2002, the Board of Directors adopted a Shareholder Rights Plan. One Right was distributed for each share of common stock, par value $.01 per share, of the Company held by stockholders of record as of the close of business on May 31, 2002. The Rights initially entitle stockholders to buy a unit representing one one-hundredth of a share of a new series of preferred stock of the Company for $160 and expire on May 30, 2012. The Rights generally will be exer- cisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company’s common stock. If a person or group acquires beneficial ownership of 15% or more of the Company’s common stock, each Right (other than Rights held by the acquiror) will, unless the Rights are redeemed by the Company, become exercisable upon payment of the exercise price of $160 for common stock of the Company having a market value of twice the exercise price of the Right. A copy of the Stockholder Rights Plan was filed on May 28, 2002, with the Securities and Exchange Commission, as Exhibit 99.1 to our report on Form 8-K. NEW ACCOUNTING STANDARDS In August 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset, superseding Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS 144 applies to all long-lived assets, including discontinued operations. SFAS 144 requires that those long-lived assets classified as held for sale be measured at the lower of carrying amount (cost less accumulated depreciation) or fair value less costs to sell. Discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongo- ing operations of the entity in a disposal transaction. We do not expect the adoption of the new statement to have a significant financial impact on our consolidated financial position or results of operations. In June 2002, the Financial Accounting Standards Board issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Under the new rules, a liability for the costs associated with an exit or disposal activity will be recognized when the liability is incurred as opposed to the date of an entity’s commitment to an exit plan. The new rules are effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the adoption of new rules to have a significant impact on our consolidated financial position or results of operations. 32 O ’ R e i l l y A u t o m o t i v e 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 ( c o n t i n u e d ) In December 2002, the Financial Accounting Standards Board issued Statement No. 148, Accounting for Stock- Based Compensation – Transition and Disclosure, amending SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 gives companies electing to expense employee stock options three methods to do so. In addition, the statement amends the disclosure requirements to require more prominent disclosure about the method of accounting for stock- based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. We have elected to continue using the intrinsic value method of accounting for stock-based compensation. Therefore, the new statement will not have any effect on our consolidated financial position or results of operations. See Note 10 to the Consolidated Financial Statements for additional information regarding stock-based compensation. In November 2002, the Financial Accounting Standards Board issued Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees. The interpretation elaborates on the disclosures to be made in interim and annual financial statements of a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. Initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. As of December 31, 2002, we did not have any outstanding guarantees other than subsidiary guarantees of parent debt as disclosed in Note 6 to the Consolidated Financial Statements. In January 2003, the Financial Accounting Standards Board issued Interpretation 46, Consolidation of Variable Interest Entities. The interpretation expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. The interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of the interpretation apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. We have determined that our Lessor under the Synthetic Lease Facility is a variable interest entity under Interpretation No. 46 and that we are the primary beneficiary. We are evaluating the various options and their related impact on our consolidated financial position and results of operations. During 2002, the Emerging Issues Task Force reached a consensus on Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor.” Under the new guidance, cash consideration received from a vendor should be classified as a reduction of cost of sales. If the consideration received represents a payment for assets delivered to the vendor, it should be classified as revenue. If the consideration is a reimbursement of a specific, incremental, identifiable cost incurred in selling the vendor’s product, the cost should be characterized as a reduction of that cost incurred. The guidance is effective for fiscal periods beginning after December 15, 2002. We do not expect the adoption of this guidance to have a significant impact on our consolidated financial position or results of operations. FORWARD-LOOKING STATEMENTS We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained within this document discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described in these forward-looking statements. Please refer to the Risk Factors sections of the Company’s Form 10-K for the year ended December 31, 2002, for more details. 2 0 0 2 A n n u a l R e p o r t 33 2 0 0 2 2 0 0 1 $ 29,333 $ 15,041 45,421 42,918 504,098 — 5,040 4,235 631,045 52,362 160,425 57,376 177,293 44,067 491,523 137,922 353,601 1,880 22,893 41,486 38,440 447,793 168 3,908 3,827 550,663 48,096 121,250 45,456 143,046 34,517 392,365 103,361 289,004 2,557 14,635 $1,009,419 $ 856,859 $ — $ 9,798 85,370 15,257 19,165 17,150 682 147,422 190,470 15,939 5,064 — 5,000 — 61,875 12,866 14,038 15,514 11,843 121,136 165,618 9,141 4,673 — — — 534 269,030 380,960 650,524 528 256,795 298,968 556,291 $1,009,419 $ 856,859 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 (In thousands, except per share data) D E C E M B E R 3 1 , Assets Current assets: Cash Accounts receivable, less allowance for doubtful accounts of $865 in 2002 and $1,760 in 2001 Amounts receivable from vendors, net Inventory Refundable income taxes Deferred income taxes Other current assets Total current assets Property and equipment, at cost: Land Buildings Leasehold improvements Furniture, fixtures and equipment Vehicles Accumulated depreciation and amortization Net property and equipment Notes receivable Other assets, net Total assets Liabilities and shareholders’ equity Current liabilities: Notes payable to bank Income taxes payable Accounts payable Accrued payroll Accrued benefits and withholdings Other current liabilities Current portion of long-term debt Total current liabilities Long-term debt, less current portion Deferred income taxes Other liabilities Commitments and contingencies Shareholders’ equity: Preferred stock, $0.01 par value: Authorized shares – 5,000,000 Issued and outstanding shares – none Common stock, $0.01 par value: Authorized shares – 90,000,000 Issued and outstanding shares – 53,371,242 in 2002 and 52,850,713 in 2001 Additional paid-in capital Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes. 34 O ’ R e i l l y A u t o m o t i v e 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 (In thousands, except per share data) Y E A R S E N D E D D E C E M B E R 3 1 , 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. 2 0 0 2 2 0 0 1 2 0 0 0 $1,312,490 $1,092,112 $ 890,421 759,090 624,294 507,720 415,099 353,987 292,672 1,174,189 978,281 800,392 138,301 113,831 90,029 (9,248) 989 940 (7,319) (9,092) 1,362 626 (7,104) 130,982 48,990 106,727 40,375 (8,362) 439 1,053 (6,870) 83,159 31,451 $ 81,992 $ 66,352 $ 51,708 $ $ 1.54 $ 1.27 $ 1.01 53,114 52,121 51,168 1.53 $ 1.26 $ 1.00 53,692 52,786 51,728 2 0 0 2 A n n u a l R e p o r t 35 C O N S O L I D A T E D S T A T E M E N T S S H A R E H O L D E R S ’ E Q U I T Y (in thousands) Balance at December 31, 1999 Issuance of common stock under employee benefit plans Issuance of common stock under stock option plans Tax benefit of stock options exercised Net income Balance at December 31, 2000 Issuance of common stock under employee benefit plans Issuance of common stock under stock option plans Tax benefit of stock options exercised Net income Balance at December 31, 2001 Issuance of common stock under employee benefit plans Issuance of common stock under stock option plans Tax benefit of stock options exercised Net income A D D I T I O N A L C O M M O N S T O C K PA I D - I N R E TA I N E D S H A R E S PA R VA L U E C A P I TA L E A R N I N G S T O TA L 50,800 $508 $221,628 $180,908 $403,044 364 381 — — 3 4 — — 4,535 3,460 977 — — 4,538 — — 51,708 3,464 977 51,708 51,545 515 230,600 232,616 463,731 223 1,083 — — 2 11 — — 4,856 — 4,858 14,924 6,415 — — — 66,352 14,935 6,415 66,352 52,851 528 256,795 298,968 556,291 223 297 — — 3 3 — — 6,094 4,677 1,464 — — 6,097 — — 81,992 4,680 1,464 81,992 Balance at December 31, 2002 53,371 $534 $269,030 $380,960 $650,524 See accompanying notes. 36 O ’ R e i l l y A u t o m o t i v e 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 (In thousands) Y E A R S E N D E D D E C E M B E R 3 1 , Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization Provision for doubtful accounts Loss (Gain) on sale of property and equipment Deferred income taxes Common stock contributed to employee benefit plans Tax benefit of stock options exercised Changes in operating assets and liabilities, net of the effects of the acquisition: Accounts receivable Amounts receivable from vendors Inventory Refundable income taxes Other current assets Accounts payable Income taxes payable Accrued payroll Accrued benefits and withholdings Other current liabilities Other liabilities 2 0 0 2 2 0 0 1 2 0 0 0 $ 81,992 $ 66,352 $ 51,708 35,923 984 1,873 (58) 5,666 3,512 1,464 (5,701) (4,478) (56,305) 168 (788) 23,495 9,798 2,391 5,127 (1,148) 618 28,963 1,581 2,635 (158) 6,371 2,690 6,415 (3,432) (7,908) (35,115) (76) 1,244 (16,891) (1,011) 3,557 4,678 (9,756) (110) 23,846 966 1,235 220 3,245 2,648 977 (7,446) (3,191) (78,145) 2,241 (444) 4,062 1,011 3,031 (1,022) 870 20 5,832 (81,987) 52,861 — 604 (11,995) Net cash provided by operating activities 104,533 50,029 Investing activities Purchases of property and equipment Proceeds from sale of property and equipment Acquisition, net of cash acquired Payments received on notes receivable Investment in other assets (102,257) 2,278 — 862 (6,268) (68,521) 8,534 (20,536) 721 1,956 Net cash used in investing activities (105,385) (77,846) (40,517) 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 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. — (5,000) 179,640 (166,761) 7,265 15,144 14,292 15,041 5,000 (35,000) 289,974 (243,422) 17,102 30,000 — 431,159 (432,415) 5,354 33,654 34,098 5,837 9,204 (587) 9,791 $ 29,333 $ 15,041 $ 9,204 2 0 0 2 A n n u a l R e p o r t 37 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 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 Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Tennessee 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 the consolidated financial statements, in conformity with accounting principles generally accepted in the United States (“GAAP”), requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates. Inventory Inventory, which consists of automotive hard parts, maintenance items, accessories and tools, is stated at the lower of cost or market. Cost has been determined using the last-in, first-out (“LIFO”) method. If the first-in, first-out (“FIFO”) method of costing inventory had been used by the Company, inventory would have been $499,501,000 and $442,989,000 as of December 31, 2002, and 2001, respectively. Amounts Receivable from Vendors Amounts receivable from vendors consist primarily of amounts due the Company for changeover merchandise, rebates and other allowances. Reserves for uncollectable amounts receivable from vendors are provided for in the Company’s Consolidated Financial Statements and consistently have been within management’s expectations. Property and Equipment Property and equipment are carried at cost. Depreciation is provided on straight-line and accelerated methods over the estimated useful lives of the assets. Service lives for property and equipment generally range from three to forty years. Leasehold improvements are amortized over the terms of the underlying leases. Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost and accumulated depreciation are eliminated and the gain or loss, if any, is included in the determination of net income as a component of other income (expense). The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. 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, 2002, 2001 and 2000, were $369,000, $324,000 and $1,354,000, respectively. Income Taxes The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109. The liability method provides that deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Advertising Costs The Company expenses advertising costs as incurred. Advertising expense charged to operations amounted to $14,442,000, $12,796,000 and $12,150,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Pre-opening Costs Costs associated with the opening of new stores, which consist primarily of payroll and occupancy costs, are charged to operations as incurred. Stock Option Plans The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations in accounting for its employee stock options because, as discussed in Note 10, the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, requires the use of option valuation models that were not developed for use in valuing employee stock options. Under the intrinsic method in accordance with APB 25, because the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 38 O ’ R e i l l y A u t o m o t i v e 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 ( c o n t i n u e d ) NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Earnings per Share Basic earnings per share is based on the weighted-average outstanding common shares. Diluted earnings per share is based on the weighted-average outstanding shares adjusted for the effect of common stock equivalents. Stock equiv- alents that could potentially dilute basic EPS in the future that were not included in the fully diluted computation because they would have been antidilutive were 577,551 and 664,650 for the years ended December 31, 2002, and 2001, respectively. 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 $1,911,000 and $1,991,000 at December 31, 2002, and 2001, respectively, bears interest at 6% and is due in August 2017. These amounts are included in other current assets in the accompanying consolidated balance sheet. 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 Certain reclassifications have been made to the 2001 and 2000 consolidated financial statements in order to conform to the 2002 presentation. New Accounting Pronouncements In August 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset, superseding Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS 144 applies to all long-lived assets, including discontinued operations. SFAS 144 requires that those long-lived assets classified as held for sale be measured at the lower of carrying amount (cost less accumulated depreciation) or fair value less costs to sell. Discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongo- ing operations of the entity in a disposal transaction. The Company does not expect the adoption of the new statement to have a significant financial impact on our consolidated financial position or results of operations. In June 2002, the Financial Accounting Standards Board issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Under the new rules, a liability for the costs associated with an exit or dis- posal activity will be recognized when the liability is incurred, as opposed to the date of an entity’s commitment to an exit plan. The new rules are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of new rules to have a significant impact on our consolidated financial position or results of operations. In December 2002, the Financial Accounting Standards Board issued Statement No. 148, Accounting for Stock- Based Compensation – Transition and Disclosure, amending SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 gives companies electing to expense employee stock options three methods to do so. In addition, the state- ment amends the disclosure requirements to require more prominent disclosure about the method of accounting for stock-based employee compensation and the effect of the method used on reported results in both annual and interim financial statements. The Company has elected to continue using the intrinsic value method of accounting for stock- based compensation. Therefore, the new statement will not have any effect on the Company’s consolidated financial position or results of operations. See Note 10 to the Consolidated Financial Statements for additional information regarding stock-based compensation. In November 2002, the Financial Accounting Standards Board issued Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees. The interpretation elaborates on the disclosures to be made in interim and annual financial statements of a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. Initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or motified after December 31, 2002. The disclosure require- ments are effective for financial statements of interim or annual periods ending after December 15, 2002. As of December 31, 2002, the Company does not have an outstanding guarantees other than subsidiary guarantees of parent debt as disclosed in Note 6 to the Consolidated Financial Statements. 2 0 0 2 A n n u a l R e p o r t 39 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 ( c o n t i n u e d ) NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In January 2003, the Financial Accounting Standards Board issued Interpretation 46, Consolidation of Variable Interest Entities. The interpretation expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. The interpretation requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of the interpretation apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. The Company has determined that its Lessor under the Synthetic Lease Facility is a variable interest entity under Interpretation No. 46 and that the Company is the primary beneficiary. During 2002, the Emerging Issues Task Force reached a consensus on Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor.” Under the new guidance, cash consideration received from a vendor should be classified as a reduction of cost of sales. If the consideration received represents a payment for assets delivered to the vendor, it should be classified as revenue. If the consideration is a reimbursement of a specific, incremental, identifiable cost incurred in selling the vendor’s product, the cost should be characterized as a reduction of that cost incurred. The guidance is effective for fiscal periods beginning after December 15, 2002. The Company does not expect the adoption of this guidance to have a significant impact on our consolidated financial position or results of operations. Shareholder Rights Plan On May 17, 2002, the Board of Directors adopted a Shareholder Rights Plan. One Right was distributed for each share of common stock, par value $.01 per share, of the Company held by stockholders of record as of the close of business on May 31, 2002. The Rights initially entitle stockholders to buy a unit representing one one-hundredth of a share of a new series of preferred stock of the Company for $160 and expire on May 30, 2012. The Rights generally will be exer- cisable only if a person or group acquires beneficial ownership of 15% or more of the Company’s common stock or commences a tender or exchange offer upon consummation of which such person or group would beneficially own 15% or more of the Company’s common stock. If a person or group acquires beneficial ownership of 15% or more of the Company’s common stock, each Right (other than Rights held by the acquiror) will, unless the Rights are redeemed by the Company, become exercisable upon payment of the exercise price of $160 for common stock of the Company having a market value of twice the exercise price of the Right. A copy of the Stockholder Rights Plan was filed on May 28, 2002, with the Securities and Exchange Commission, as Exhibit 99.1 to our report on Form 8-K. NOTE 2—ACQUISITION On October 1, 2001, the Company purchased all of the outstanding stock of Mid-State Automotive Distributors, Inc. (“Mid-State”) for approximately $20.5 million including acquisition costs. Mid-State was a specialty retailer which supplied automotive aftermarket parts throughout certain states in the southeastern part of the United States. The acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations of Mid-State are included in the consolidated statements of income from the date of acquisition. The purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The pro forma effect on earnings of the acquisition of Mid-State was not material. NOTE 3—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, 2002, and 2001, 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 share- holders 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 $3,222,000, $2,894,000 and $2,671,000 in 2002, 2001 and 2000, respectively. 40 O ’ R e i l l y A u t o m o t i v e 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 ( c o n t i n u e d ) NOTE 5—NOTE PAYABLE TO BANK At December 31, 2001, the Company had available short-term unsecured bank lines of credit providing for maximum borrowings of $5 million, all of which was outstanding at December 31, 2001. The lines of credit, which expired in 2002, bore interest at LIBOR plus 0.50% and were fully repaid in 2002. Additionally, at December 31, 2001, the Company had available a short-term line of credit in the amount of $25 million, none of which was outstanding at December 31, 2001. The line of credit bore interest at LIBOR plus 0.75%. Neither line of credit was renewed during 2002. NOTE 6—LONG-TERM DEBT On July 29, 2002, the Company completed an unsecured, three-year syndicated credit facility (the “Credit Facility”) in the amount of $150 million led by Wells Fargo Bank as the Administrative Agent replacing a five-year syndicated credit facility. The Credit Facility is guaranteed by all of our subsidiaries and may be increased to a total of $200 million, subject to availability of such additional credit from either existing banks within the Credit Facility or other banks. The Credit Facility bears interest at LIBOR plus .875% (2.26% at December 31, 2002) and expires in July 2005. At December 31, 2002, $90,000,000 of the Credit Facility was outstanding. At December 31, 2001, the Company had available an unsecured credit facility providing for maximum borrowings of $140 million. The facility was comprised of a revolving credit facility of $125 million, and a term loan of $15 million. At December 31, 2001, $61,350,000 of the revolving credit facility and $15 million of the term loan was outstanding. The credit facility, which bore interest at LIBOR plus 0.50%, expired in January 2003. All borrowings outstanding under the old credit facility at December 31, 2001, were fully repaid in 2002. On May 16, 2001, the Company completed a $100 million private placement of two series of unsecured senior notes (“Senior Notes”). The Series 2001-A Senior Notes were issued for $75 million, are due May 16, 2006, and bear interest at 7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are due May 16, 2008, and bear interest at 7.92% per year. The private placement agreement allows for a total of $200 million of Senior Notes issuable in series. Proceeds from the transaction were used to reduce outstanding borrowings under the Company’s former revolving credit facility. During 2002 and 2001, the Company leased certain computer equipment under capitalized leases. The lease agreements have three-year terms expiring from 2003 to 2005. At December 31, 2002, the monthly installments under these agreements were approximately $53,000. The present value of the future minimum lease payments under these agreements totaled $549,000 and $427,000 at December 31, 2002, and 2001, respectively, which has been classi- fied as long-term debt in the accompanying consolidated financial statements. During 2002, 2001 and 2000, the Company purchased $812,000, $467,000 and $800,000, respectively, of assets under capitalized leases. Additionally, the Company has various unsecured notes payable to individuals and banks, amounting to $172,000 and $251,000, at December 31, 2002, and 2001, respectively. The average interest rate on these notes is 5.25% with monthly installments approximate $7,000 including interest. Indirect borrowings under letters of credit provided by a $20,000,000 sublimit of the Credit Facility totaled $6,028,000 and $210,650 at December 31, 2002, and 2001, respectively. These letters of credit reduced availability of borrowings at December 31, 2002, and 2001. Principal maturities of long-term debt for each of the next five years ending December 31, are as follows: (amounts in thousands) 2003 2004 2005 2006 2007 Thereafter $ 682 332 90,102 75,015 17 25,004 $ 191,152 Cash paid by the Company for interest during the years ended December 31, 2002, 2001 and 2000, amounted to $9,248,000, $9,092,000 and $8,240,000, respectively. 2 0 0 2 A n n u a l R e p o r t 41 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 ( c o n t i n u e d ) NOTE 7—COMMITMENTS Lease Commitments 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 generally 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 through December 15, 2005, and has an option to request two additional successive renewal periods of five years each. The Facility provides for a residual value guarantee of $41.7 million at December 31, 2002, and purchase options on the properties. It also contains provisions for an event of default whereby the Lessor, among other things, may require the Company to purchase any or all of the properties. The Company is utilizing the Facility to finance a portion of its store growth. Funding under the Facility at December 31, 2002, and 2001, totaled $49.0 million and $43.0 million, respectively. Future minimum rental commitments under the Facility have been included in the table of future minimum annual rental commitments below. The Company’s lessor under the Facility acts as lessor to numerous other lessees under similar synthetic lease arrangements and has no other operations. The Company’s maximum loss under its Facility is limited to its $41.7 million residual value guarantee and none of the Company’s assets have been pledged as collateral for the Lessor’s obligations. 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 approxi- mately $5.5 million annually and is included in the table of future minimum annual rental commitments. Proceeds from the transaction were used to reduce outstanding borrowings under the Company’s former revolving credit facility. On May 16, 2001, the Company completed a $100 million private placement of two series of unsecured senior notes (“Senior Notes”). The Series 2001-A Senior Notes were issued for $75 million, are due May 16, 2006, and bear interest at 7.72% per year. The Series 2001-B Senior Notes were issued for $25 million, are due May 16, 2008, and bear interest at 7.92% per year. The private placement agreement allows for a total of $200 million of Senior Notes issuable in series. Proceeds from the transaction were used to reduce outstanding borrowings under the Company’s former revolving credit facility. In August 2001, the Company completed a sale-leaseback with O’Reilly-Wooten 2000 LLC (an entity owned by certain shareholders of the Company). The transaction closed on September 1, 2001, with a purchase price of approximately $5.6 million for nine O’Reilly Auto Parts stores and did not result in a material gain or loss. The lease, which has been accounted for as an operating lease, calls for an initial term of 15 years with three five-year renewal options. 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, 2002, future minimum rental payments for each of the next five years and in the aggregate are as follows: (amounts in thousands) 2003 2004 2005 2006 2007 Thereafter R E L AT E D N O N - R E L AT E D PA R T I E S PA R T I E S T O TA L $ 2,240 1,855 1,626 1,398 1,332 8,700 $ 27,642 25,211 22,654 19,318 16,956 123,369 $ 29,882 27,066 24,280 20,716 18,288 132,069 $ 17,151 $235,150 $252,301 Rental expense amounted to $29,652,000, $25,122,000 and $16,219,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Other Commitments The Company had construction commitments, which totaled approximately $41.1 million, at December 31, 2002. NOTE 8—LEGAL PROCEEDINGS The Company was a defendant in a lawsuit entitled “Coalition for Level Playing Field, L.L.C., et. AL., v. AutoZone, Inc., et. AL.,” in the United States District Court for the Eastern District of New York. The suit had been brought by a group of automotive aftermarket warehouse distributors and jobbers, who alleged that the defendants, including the Company, were in violation of the Robinson-Patman Act. The Company settled the case for an undisclosed amount that did not have a material impact on the consolidated financial position or results of operations. The Company is involved in various legal proceedings incidental to the conduct of its business. Although the Company cannot ascertain the amount of liability that it may incur from any of these matters, it does not currently believe that, in the aggregate, they will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. 42 O ’ R e i l l y A u t o m o t i v e 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 ( c o n t i n u e d ) NOTE 9—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 100% of their annual compensa- tion subject to Internal Revenue Code maximum limitations. The Company has agreed to make matching contributions equal to 50% of the first 2% of each employee’s contribution and 25% of the next 4% of each employee’s contribution. Additional contributions to the plan may be made as determined annually by the Board of Directors. After two years of service, Company contributions and earnings thereon vest at the rate of 20% per year. Company contributions charged to operations amounted to $3,438,000 in 2002, $3,207,000 in 2001 and $2,454,000 in 2000. Company contribu- tions, 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: Y E A R C O N T R I B U T E D 2002 2001 2000 S H A R E S 41,332 37,567 49,891 M A R K E T VA L U E $1,202,000 969,000 724,000 Profit sharing contributions accrued at December 31, and funded in the next year through the issuance of shares of the Company’s common stock were as follows: Y E A R F U N D E D 2002 2001 2000 S H A R E S 77,876 88,118 132,890 M A R K E T VA L U E $2,200,000 1,729,000 1,919,000 The Company also sponsors a non-funded non-contributory defined benefit healthcare plan, which provides certain health benefits to qualified retired employees. According to the terms of this plan, retirees’ annual benefits are limited to $1,000 per employee starting at age 66 for employees with 20 or more years of service. Post-retirement benefit costs for each of the years ended December 31, 2002, 2001 and 2000 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 not to exceed 5% of the participant’s annual salary. Purchases of common stock under the plan during the years ended December 31 were as follows: Y E A R 2002 2001 2000 S H A R E S 102,662 97,991 147,315 W E I G H T E D - AV E R A G E P R I C E $25.18 22.13 12.83 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, 5,881 shares were issued during 2002, no shares were issued during 2001, and 12,164 shares were issued during 2000. 2 0 0 2 A n n u a l R e p o r t 43 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 ( c o n t i n u e d ) NOTE 10—STOCK OPTION PLANS The Company has a stock option plan under which incentive stock options or non-qualified stock options may be granted to officers and key employees. An aggregate of 8,000,000 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. 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. All grants under the plan since its inception have been non-qualified stock option grants. A summary of outstanding stock options under this plan is as follows: Outstanding at December 31, 1999 Granted Exercised Canceled Outstanding at December 31, 2000 Granted Exercised Canceled Outstanding at December 31, 2001 Granted Exercised Canceled Outstanding at December 31, 2002 P R I C E P E R S H A R E $ 6.07 - 26.75 10.56 - 24.38 6.07 - 22.75 10.00 - 25.88 $ 8.00 - 26.75 14.37 - 37.62 7.88 - 35.21 8.00 - 34.30 $ 8.69 - 37.62 24.96 - 37.25 8.69 - 26.75 8.75 - 38.00 $ 8.94 - 37.62 N U M B E R O F S H A R E S 3,346,480 581,250 (362,125) (206,625) 3,358,980 1,279,000 (1,012,695) (220,787) 3,404,498 630,750 (294,693) (206,075) 3,532,565 Options to purchase 1,566,104, 1,250,261 and 1,729,033 shares of common stock were exercisable at December 31, 2002, 2001 and 2000, 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 under this plan is as follows: Outstanding at December 31, 1999 Granted Exercised Outstanding at December 31, 2000 Granted Exercised Outstanding at December 31, 2001 Granted Outstanding at December 31, 2002 P R I C E P E R S H A R E $ 6.56 - 23.91 12.44 6.56 - 6.75 $ 9.09 - 23.91 20.65 9.09 - 23.91 $12.44 - 23.91 29.02 $12.44 - 29.02 N U M B E R O F S H A R E S 90,000 20,000 (20,000) 90,000 30,000 (70,000) 50,000 30,000 80,000 All options under this plan were exercisable at December 31, 2002, 2001 and 2000. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee and non-employee director stock options under the fair value method. The fair values for these options were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001 and 2000, respectively: risk-free interest rates of 4.01%, 5.16% and 5.02%; volatility factors of the expected market price of the Company’s common stock of .481, .475 and .442; and weighted-average expected life of the options of 9, 9 and 8.9 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, 2002, 2001 and 2000 were $17.75, $16.52 and $9.24, respectively. The weighted-average remaining contractual life at December 31, 2002, for all outstanding options under the Company’s stock option plans 44 O ’ R e i l l y A u t o m o t i v e 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 ( c o n t i n u e d ) NOTE 10—STOCK OPTION PLANS (continued) is 7.058 years. The weighted-average exercise price for all outstanding options under the Company’s stock option plans was $22.78, $20.63 and $16.12 at December 31, 2002, 2001 and 2000, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assump- tions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information for the years ended December 31, is as follows: (In thousands, except per share data) Net income as reported Stock-based compensation expense as reported Stock-based compensation expense under fair value method Pro forma net income Pro forma basic net income per share Pro forma net income per share – assuming dilution 2 0 0 2 2 0 0 1 2 0 0 0 $81,992 $66,352 $51,708 $ — $ — $ — $ 7,217 $ 5,406 $ 3,531 $74,775 $60,946 $48,177 $ 1.41 $ 1.17 $ 0.94 $ 1.39 $ 1.15 $ 0.93 NOTE 11—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) Y E A R S E N D E D D E C E M B E R 3 1 , Numerator (basic and diluted): Net income Denominator: Denominator for basic income per common share – weighted-average shares Effect of stock options (Note 10) Denominator for diluted income per common share – 2 0 0 2 2 0 0 1 2 0 0 0 $81,992 $66,352 $51,708 53,114 578 52,121 665 51,168 560 adjusted weighted-average shares and assumed conversion 53,692 52,786 51,728 Basic net income per common share Net income per common share – assuming dilution $ $ 1.54 1.53 $ $ 1.27 1.26 $ $ 1.01 1.00 2 0 0 2 A n n u a l R e p o r t 45 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 ( c o n t i n u e d ) NOTE 12—INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows at December 31: (In thousands) Deferred tax assets: Current: Allowance for doubtful accounts Inventory carrying value Other accruals Deferred tax liabilities: Current: Inventory carrying value Noncurrent: Property and equipment Other Total deferred tax liabilities Net deferred tax liabilities The provision for income taxes consists of the following: (In thousands) 2002: Federal State 2001: Federal State 2000: Federal State 2 0 0 2 2 0 0 1 $ 327 967 3,746 5,040 $ 665 — 4,284 4,949 — 1,041 15,685 254 8,333 808 15,939 10,182 $(10,899) $ (5,233) C U R R E N T D E F E R R E D T O TA L $39,038 4,286 $ 5,113 553 $44,151 4,839 $43,324 $ 5,666 $48,990 $30,429 3,575 $ 5,702 669 $36,131 4,244 $34,004 $ 6,371 $40,375 $25,120 3,086 $ 2,946 299 $28,066 3,385 $28,206 $ 3,245 $31,451 A reconciliation of the provision for income taxes to the amounts computed at the federal statutory rate is as follows: (In thousands) Federal income taxes at statutory rate State income taxes, net of federal tax benefit Other items, net 2 0 0 2 2 0 0 1 2 0 0 0 $45,844 3,140 6 $37,354 2,775 246 $29,106 2,200 145 $48,990 $40,375 $31,451 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, 2002, 2001 and 2000, cash paid by the Company for income taxes amounted to $31,119,000, $28,676,000 and $24,244,000, respectively. 46 O ’ R e i l l y A u t o m o t i v e 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 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, 2002, and 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsi- bility 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 state- ments 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, 2002, and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Kansas City, Missouri February 21, 2003 2 0 0 2 A n n u a l R e p o r t 47 C O N S E N T O F E R N S T & Y O U N G L L P , I N D E P E N D E N T A U D I T O R S We consent to the incorporation by reference in this Annual Report (Form 10-K) of O’Reilly Automotive, Inc. and Subsidiaries of our report dated February 21, 2003, included in the 2002 Annual Report to Shareholders of O’Reilly Automotive, Inc. and Subsidiaries. Our audits also included the consolidated financial statements schedule of O’Reilly Automotive, Inc. and Subsidiaries listed in Item 14(a). These schedules are the responsibility of the Company’s management. Our responsi- bility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-61632, Form S-8 No. 33-73892 and Form S-8 No. 33-91022) of O’Reilly Automotive, Inc. of our report dated February 21, 2003, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the pre- ceding paragraph with respect to the consolidated financial statement schedules included in this Annual Report (Form 10-K) of O’Reilly Automotive, Inc. for the year ended December 31, 2002. Kansas City, Missouri March 24, 2003 48 O ’ R e i l l y A u t o m o t i v e 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 Tricia Headley Vice President of Corporate Services and Corporate Secretary David McCready Vice President of Distribution Operations Steve Pope Vice President of Human Resources Jeff Shaw Vice President of Southern Division Jerry Skaggs Vice President of Sales Mike Swearengin Vice President of Merchandise Mike Williams Vice President of Information Systems (1)Member of Audit Committee (2)Member of Compensation Committee Chub O’Reilly Chairman of the Board Emeritus and Director Charlie O’Reilly Vice Chairman of the Board and Director David O’Reilly Co-Chairman of the Board and Chief Executive Officer and Director Joe C. Greene(1)(2) Director since 1993 Attorney, Husch & Eppenberger, LLC Managing Partner, Greene & Curtis, LLP Director, Bass Pro, Inc. Director, Ozarks Coca-Cola Bottling Co. Chairman, Missouri Sports Hall of Fame Larry O’Reilly Co-Chairman of the Board and Chief Operating Officer and Director Executive Secretary, Missouri Golf Association Director, Commerce Bank Rosalie O’Reilly-Wooten Director Ted Wise Co-President Greg Henslee Co-President Jay Burchfield(1)(2) Director since 1997 President, Oklahoma City Bakery, Inc. Director and Chairman of the Board, Trust Company of the Ozarks Director, Quest Capital Alliance Director, The Primary Care Network Director and Chairman of the Board, City Bancorp Paul Lederer(1)(2) Director 1993-July 1997; Feb. 2001 Director, R&B, Inc. Director, Icarz.com Director, Trans-Pro, Inc. Advisory Board, Richco, Inc. Advisory Board, The Wine Discount Center Jim Batten Vice President of Finance Chief Financial Officer Ron Byerly Vice President of Marketing, Advertising and Training Alan Fears Vice President of Store Expansion and Acquisitions O P E R A T I O N S M A N A G E M E N T SENIOR MANAGEMENT Allen Alexander Director of Iowa/Nebraska Region Buddy Ball Director of Kansas City Region Tony Bartholomew Director of Southern Division Sales Greg Beck Director of Purchasing Bert Bentley Director of Houston Region Rob Bodenhamer Director of Technology Development Larry Boevers Regional DC Director Doug Bragg Director of Oklahoma Region Mary Brown Director of Human Resources Joe Hankins Director of Store Design Mike Chapman Director of Dallas/Fort Worth Region Brett Heintz Director of Retail Systems Keith Childers Director of Little Rock Region Jaime Hinojosa Director of Valley Region Ken Cope Director of Nashville Region Charlie Downs Director of Store Expansion Joe Edwards Director of Store Installation Phyllis Evans Director of Store Administration John Grassham Director of Dallas Region Jack House Director of Customer Service Greg Johnson Director of Distribution Randy Johnson Director of Inventory Control Michelle Kimrey Director of Finance Brad Knight Director of Pricing 2 0 0 2 A n n u a l R e p o r t 49 O P E R A T I O N S M A N A G E M E N T ( c o n t i n u e d ) Kenny Martin Director of Gulf States Region Steve Rice Director of Credit and Collections Charlie Stallcup Director of Training Jim Maynard Director of Employment and Team Member Relations Kim Mesenbrink Director of Accounting Wayne Price Director of Risk Management Barry Sabor Director of Loss Prevention Denny Smith Director of Springfield Region Dick Smith Director of Real Estate and Construction David Strom Director of Houston Region Danny Woods Director of Installer Marketing CORPORATE MANAGEMENT Tom Allen Computer Operations Manager Dan Altis Distribution Center Projects and Procedures Manager Randy Decoito Des Moines Regional Sales Manager Mark Hoehne Regional Sales Manager Jim Deshotel Houston Regional Sales Manager Chris Holder Regional Sales Manager Jay Enloe Property and Liability Risk Manager Doug Hopkins Distribution Systems Manager Keith Asby Sales Manager of Special Markets Paula Eyman Accounting Special Projects Manager Jeanene Asher Telecommunications Manager Carl Falke Oklahoma Regional Sales Manager Gary Baker Technical Service Manager Becky Fincher Advertising Manager Mike Ballard Internet Development Manager Kevin Ford Regional Distribution Center Manager Carl Barina West Texas Regional Sales Manager Randy Freund Springfield Regional Sales Manager Doug Bennett Sales Department Manager David Furr Service Equipment Sales Manager Steve Berger Safety Manager Lori Fuzzell Customer Service Manager Ron Biegay Southern Division Training Manager Art Glidewell Dallas Distribution Center Manager Larry Blundell Regional Field Sales Manager Tom Bollinger Regional Field Sales Manager Bridget Brashears PC Support Manager David Glore Ozark Sales Manager Garry Glossip Store Accounting Manager Ron Greenway Tax Manager Kent Brewer Distribution Center Transportation Manager Larry Gregory Real Estate Store Maintenance Manager Yvonne Cannon Payroll Manager Julie Carroll Des Moines Distribution Center Manager Tom Connor Springfield Distribution Center Manager Garry Curbow Replenishment Manager Cecil Davis Distribution Center Inbound Manager Kevin Greven Retail Marketing and Promotions Manager Mike Hauk Central Division Training Manager Doy Hensley Help Support Manager Julie Hibler Corporate Services Manager Diana Hicks Internal Communications Manager Vicki Hume Corporate Administration Travel Manager Doug Hutchison Inventory Project Manager Steve Jasinski Systems Development Manager Curtis Johnson Nashville Distribution Center Manager Gene Johnson Real Estate Property Manager Dave Jordan Kansas City Distribution Center Manager Les Keeth Supplier Credit Manager Dave Leonhart Oklahoma City Distribution Center Manager Steve Lines Sales Training Manager Jim Litchford Regional Sales Manager Jeff Main Jobber Systems Sales Manager Ed Martinez Houston Distribution Center Manager Jeff McKinney Customer Satisfaction Manager Bob McNabb Payroll Systems Manager Bryan Mescher Regional Sales Manager Chapman Norman Inventory Maintenance Manager Brad Oplotnik Systems and Network Manager 50 O ’ R e i l l y A u t o m o t i v e O P E R A T I O N S M A N A G E M E N T ( c o n t i n u e d ) Steve Peterie Construction Design Manager Tony Phelps Little Rock Distribution Center Manager Jana Phillips Real Estate Contract Administrator Manager Steve Phillips Southern Division Loss Prevention Manager Ed Randall Real Estate Site Acquisition Manager Shari Reaves Benefits Manager Art Rodriguez Regional Sales Manager Chuck Rogers Installer Systems Manager Mary Sabor Distribution Center Administrative Services Manager Rick Samsel Inventory Control Manager Joyce Schultz Houston Office Manager Tom Seboldt Senior Product Manager Bill Seiber Knoxville Distribution Center Manager Darren Shaw Product Manager Keith Slemp Regional Sales Manager Tim Smith Credit Manager Tom Smith Training Department Manager Dwayne Snow Regional Sales Manager Paul Stinson Regional Sales Manager Mary Stratton Human Resources Records Manager Cliff Tomerlin Regional Sales Manager Tom Tunnell Financial Reporting and Budgeting Manager Rob Verch Product Manager Tamra Waitman Assistant Controller Patton Walden Division Training Manager Jeff Watts Regional Sales Manager Larry Wiles Audio Visual Communications Manager Saundra Wilkinson Store Support Manager Joe Winterberg Product Manager Wes Wise Installer Marketing Manager Terry Yates Regional Sales Manager DISTRICT CORPORATE MANAGEMENT Eddie Allen Chuck Avis Emmitt Barina Brince Beasley Brad Beckham Steve Beil Aaron Biggs Tim Brakebill Patrick Brown Jay Burroughs Jimmy Carter David Chavis Dirk Chester Ken Coda Kenny Criss Bruce Dowell Dan Dowell Tommy Dunn Dallas Engel Ron England Tony Fagan Bill Fellows Kirk Frazier Mark Frazier Jason Frizzell Kyle Gorzik Terry Grimmett Jon Haught Rick Hedges Gerry Hendrix Perry Hess Brad Hilker Mike Hollis Jeff Howard Jeff Jennings Chad Keel Butch Kelton Todd Kemper Jim Koehn Scott Kraus John Krebs Scott Leonhart Chris Lewis Rodger McClary Kevin McCurry Marc McGehee Travis McPherson Chris Meade Curt Miles Randy Morris Ciro Moya Ramon Odems Kenny Omland Kevin Overmon Ron Papay Jude Patterson Pernell Peters David Pilat Mike Platt Will Reger Tommy Rhoads Alan Riddle Larry Roof Juan Salinas Jim Scott Brad Seaborn Cliff Sedtal Steve Severe Garry Shelby Mark Smith Bob Snodgrass Brian Stecklein Scott Strayhorn Marvin Swaim Bert Tamez Randy Tanner Mike Tatum Rick Tearney Greg Thomas Dallas Thompson Justin Tracy Mark Van Hoecke Brett Warstler John Weatherly Rob Weiskirch John Wells Allen Wise Dexter Woods Mike Yates Jason York Cody Zimmerman 2 0 0 2 A n n u a l R e p o r t 51 S H A R E H O L D E R I N F O R M A T I O N 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 6, 2003, at the University Plaza Convention Center, 333 John Q. Hammons Parkway in Springfield, Missouri. Shareholders of record as of February 28, 2003, 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. 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, 2003, O’Reilly Automotive, Inc. had approximately 23,876 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. William Blair & Co. – Mark Miller Merrill Lynch – Douglas Neviera Advest – Brett Jordan U.S. Bancorp Piper Jaffray – Reed Anderson Salomon Smith Barney – Bill Julian Credit Suisse First Boston – Gary Balter Sidoti & Co. – Scott Stember 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. 2 0 0 2 2 0 0 1 H I G H L O W H I G H L O W $37.25 $28.61 27.05 24.10 24.28 24.10 34.42 32.47 31.40 37.25 $27.19 $15.50 18.75 22.60 27.00 15.50 29.45 35.54 38.44 38.44 First Quarter Second Quarter Third Quarter Fourth Quarter For the Year SUBSIDIARIES OF THE COMPANY S U B S I D I A R Y Ozark Automotive Distributors, Inc. Greene County Realty Co. O’Reilly II Aviation, Inc. Hi-Lo Automotive, Inc. Mid-State Automotive Distributors, Inc. S TAT E O F I N C O R P O R AT I O N Missouri Missouri Missouri Delaware Tennessee One hundred percent of the capital stock of each of the above listed subsidiaries is directly owned by O’Reilly Automotive, Inc. 52 O ’ R e i l l y A u t o m o t i v e m o c . n o s i r r a h k l a f . w w w – i r u o s s M i , 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 M I S S I O N S TAT E M E N T “O’Reilly Automotive will be the dominant supplier of auto parts in our market areas by offering our retail customers, professional installers and jobbers the best combination of inventory, price, quality and service; providing our team members with competitive wages and benefits, and working conditions which promote high achievement and ensure fair and equitable treatment; and providing our stockholders with an excellent return on their investment.” F O R WA R D - L O O K I N G S TAT E M E N T S We claim the protection of the safe-harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained within this document discuss, among other things, expected growth, store development and expansion strategy, business strategies, future revenues and future performance. These forward-looking statements are based on estimates, projections, beliefs and assumptions and are not guarantees of future events and results. Such statements are subject to risks, uncertainties and assumptions, including, but not limited to, competition, product demand, the market for auto parts, the economy in general, inflation, consumer debt levels, governmental approvals, our ability to hire and retain qualified employees, risks associated with the integration of acquired businesses, weather, terrorist activities, war and the threat of war. Actual results may materially differ from anticipated results described in these forward-looking statements. Please refer to the Risk Factors sections of the Company’s Form 10-K for the year ended December 31, 2002, for more details. 233 South Patterson Springfield, Missouri 65802 417-862-3333 www.oreillyauto.com 1 O ’ R e i l l y A u t o m o t i v e 

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