O'Reilly Auto Parts 2015 Annual Report Download - page 26

FORM 10-K
18
The leased facilities typically require a fixed base rent, payment of certain tax, insurance and maintenance expenses and have an original
term of, at a minimum, 20 years, subject to one five-year renewal at our option. One of our bulk facilities is leased from an entity owned
by an affiliated director's immediate family. This lease requires payment of a fixed base rent, payment of certain tax, insurance and
maintenance expenses and an original term of 15 years, subject to three five-year renewals at our option. We believe that this lease
agreement with the affiliated entity is on terms comparable to those obtainable from third parties.
Of the 4,571 stores that we operated at December 31, 2015, 1,774 stores were owned, 2,722 stores were leased from unaffiliated parties
and 75 stores were leased from entities, in which certain of our affiliated directors, or members of our affiliated director's immediate
family, and an executive officer of the Company are affiliated. Leases with unaffiliated parties generally provide for payment of a fixed
base rent, payment of certain tax, insurance and maintenance expenses and an original term of, at a minimum, 10 years, subject to one
or more renewals at our option. We have entered into separate master lease agreements with each of the affiliated entities for the occupancy
of the stores covered thereby. Such master lease agreements with three of the seven affiliated entities have been modified to extend the
term of the lease agreement for specific stores. The master lease agreements or modifications thereto expire on dates ranging from
November 30, 2016, to September 30, 2031. We believe that the lease agreements with the affiliated entities are on terms comparable
to those obtainable from third parties.
We believe that our present facilities are in good condition, are adequately insured and are adequate for the conduct of our current
operations. The store servicing capability of our 26 existing DCs is approximately 5,200 stores, providing a growth capacity of more
than 600 stores, which will increase by 250 stores with the completion of our Selma, Texas, DC, which is expected to open in the first
half of 2016. We believe the growth capacity in our 26 existing DCs, along with the additional capacity of our new Selma DC, will
provide us with the DC infrastructure needed for near-term expansion. However, as we expand our geographic footprint, we will continue
to evaluate our existing distribution system infrastructure and will adjust our distribution system capacity as needed to support our future
growth.
Item 3. Legal Proceedings
O'Reilly Automotive, Inc. and its subsidiaries (the "Company" or "O'Reilly") is currently involved in litigation incidental to the ordinary
conduct of the Company's business. The Company records reserves for litigation losses in instances where a material adverse outcome
is probable and the Company is able to reasonably estimate the probable loss. The Company reserves for an estimate of material legal
costs to be incurred in pending litigation matters. 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, these matters, taking into account applicable insurance and
reserves, will have a material adverse effect on its consolidated financial position, results of operations or cash flows in a particular quarter
or annual period.
As previously reported, the Company received a subpoena from the District Attorney of the County of Alameda, along with other
environmental prosecutorial offices in the state of California, seeking documents and information related to the handling, storage and
disposal of hazardous waste. The Company expects the District Attorney will seek injunctive and monetary relief. Management has an
ongoing and open dialogue with these agencies regarding this matter and is cooperating fully with the request; however, at this time a
prediction of the ultimate outcome of these efforts cannot be determined although the Company has accrued all amounts that it believes
to be probable and reasonably estimable and does not believe that the ultimate resolution of this matter will have a material adverse effect
on its consolidated financial position, results of operations or cash flows.
As previously reported, on June 18, 2015, a jury in Greene County, Missouri returned an unfavorable verdict in a litigated contract dispute
in the matter Meridian Creative Alliance vs. O'Reilly Automotive Stores, Inc. et. al. in the amount of $12.5 million. The Company strongly
believes that the verdict was unjust and unsupported by the law and the underlying facts and, further, that there are several potential bases
for reversal on appeal. The Company is vigorously challenging the verdict in the Court of Appeals. As of December 31, 2015, the
Company had reserved $18.8 million with respect to this matter.
Item 4. Mine Safety Disclosures
Not applicable.