O'Reilly Auto Parts 2002 Annual Report Download - page 42

NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In January 2003, the Financial Accounting Standards Board issued Interpretation 46, Co ns o lidation of Variable
Inte re s t Entitie s . 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, Acc ounting
for Ce rtain Inve s tme nts in De bt and Equity Se curitie s , 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
40 O’Reilly Automotive