O'Reilly Auto Parts 2010 Annual Report Download - page 32

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(g) Occupied under the terms of two separate leases both expiring December 31, 2018, with an unaffiliated party, subject to renewal
for two five-year terms at our option.
(h) Primary facility owned, additional space leased and occupied under the terms of lease expiring July 31, 2014, with an unaffiliated
party, subject to renewal for one five-year term at our option.
(i) Occupied under the terms of a lease expiring June 22, 2015, with an unaffiliated party, subject to renewal for three five-year terms
at our option.
(j) Occupied under the terms of a lease expiring June 30, 2025, with an unaffiliated party, subject to renewal six five-year terms at
our option.
(k) Occupied under the terms of a lease expiring June 30, 2018, with an unaffiliated party, subject to renewal for two five-year terms
at our option.
(l) Occupied under the terms of a lease expiring August 31, 2013, with an unaffiliated party, not subject to renewal.
(m) Occupied under the terms of a lease expiring April 30, 2017, with an unaffiliated party, subject to renewal for three five-year
terms at our option.
(n) Occupied under the terms of a lease expiring May 31, 2012, with an unaffiliated party, subject to renewal for four five-year terms
at our option.
(o) Occupied under the terms of a lease expiring October 31, 2012, with an unaffiliated party, not subject to renewal.
(p) Occupied under the terms of a lease expiring August 31, 2024, with an unaffiliated party, subject to renewal for four five-year
terms at our option.
Of the 3,570 stores that we operated at December 31, 2010, 1,172 stores were owned, 2,328 stores were leased from unaffiliated
parties and 70 stores were leased from one of four entities owned by O'Reilly family members. 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 two of the three
O’Reilly family 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 March 31, 2011, to December 31, 2029. 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 adequate for the conduct of our current
operations. The store servicing capability of our 23 existing DCs is approximately 4,250 stores, providing a growth capacity for over
680 stores. We believe this growth capacity will provide us with the DC infrastructure needed for near term expansion without the
need for additional DC facilities.
Item 3. Legal Proceedings
O’Reilly Litigation:
O’Reilly is currently involved in litigation incidental to the ordinary conduct of the Company’s 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,
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. In addition, O’Reilly is involved in resolving the
governmental investigations that were being conducted against CSK and CSK’s former officers prior to its acquisition by O’Reilly
Automotive, Inc. as described below.
CSK Pre-Acquisition Matters – Governmental Investigations and Actions:
As previously reported, the pre-acquisition Securities and Exchange Commission (“SEC”) investigation of CSK, which commenced in
2006, was settled in May of 2009 by administrative order without fines, disgorgement or other financial remedies. The Department of
Justice (“DOJ”)’s criminal investigation into these same matters as previously disclosed is near a conclusion and is described more
fully below. In addition, the previously reported SEC complaint against three (3) former employees of CSK for alleged conduct
related to CSK’s historical accounting practices remains ongoing. The action filed by the SEC on July 22, 2009, against Maynard L.
Jenkins, the former Chief Executive Officer of CSK seeking reimbursement from Mr. Jenkins of certain bonuses and stock sale profits
pursuant to Section 304 of the Sarbanes-Oxley Act of 2002, as previously reported, also continues. The previously reported DOJ
criminal prosecution of Don Watson, the former Chief Financial Officer of CSK, remains ongoing with trial set to commence on or
about June 7, 2011.
With respect to the ongoing DOJ investigation into CSK’s pre-acquisition accounting practices as referenced above, as previously
disclosed, O’Reilly and the DOJ agreed in principle, subject to final documentation, to resolve the DOJ investigation of CSK’s legacy
pre-acquisition accounting practices. The Company and the DOJ continue work to complete the final documentation necessary for the
execution of the Non-Prosecution Agreement previously referenced and payment of the one-time monetary penalty of $20.9 million,
also previously reported. The Company’s total reserve related to the DOJ investigation of CSK was $21.4 million as of December 31,
2010, which relates to the amount of the monetary penalty and associated legal costs.
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Notwithstanding the agreement in principle with the DOJ, several of CSK’s former directors or officers and current or former
employees have been or may be interviewed or deposed as part of criminal, administrative and civil investigations and lawsuits. As
described above, certain former employees of CSK are the subject of civil and criminal litigation commenced by the government.
Under Delaware law, the charter documents of the CSK entities and certain indemnification agreements, CSK has certain obligations
to indemnify these persons and, as a result, O’Reilly is currently incurring legal fees on behalf of these persons in relation to pending
matters. Some of these indemnification obligations and other related costs may not be covered by CSK’s insurance policies.
As a result of the CSK acquisition, O’Reilly expects to continue to incur ongoing legal fees related to the indemnity obligations related
to the litigation that has commenced by the DOJ and SEC of CSK’s former employees. O’Reilly has a remaining reserve, with respect
to such indemnification obligations, of $18.8 million as of December 31, 2010, which was primarily recorded as an assumed liability
in the Company’s allocation of the purchase price of CSK.
The foregoing governmental investigations and indemnification matters are subject to many uncertainties, and, given their complexity
and scope, their final outcome cannot be predicted at this time. It is possible that in a particular quarter or annual period the
Company’s results of operations and cash flows could be materially affected by an ultimate unfavorable resolution of such matters,
depending, in part, upon the results of operations or cash flows for such period. However, at this time, management believes that the
ultimate outcome of all of such regulatory proceedings and other matters that are pending, after consideration of applicable reserves
and potentially available insurance coverage benefits not contemplated in recorded reserves, should not have a material adverse effect
on the Company’s consolidated financial condition, results of operations and cash flows.
Item 4. Reserved
FORM 10-K