O'Reilly Auto Parts 2011 Annual Report Download - page 30

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Of the 3,740 stores that we operated at December 31, 2011, 1,286 stores were owned, 2,381 stores were leased from unaffiliated
parties and 77 stores were leased from entities in which certain of our affiliated directors, members of our affiliated director’s
immediate family, or our executive officers, 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 two of the six 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 March 31, 2013, 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 23 existing DCs is approximately 4,340 stores, providing a growth capacity of more
than 500 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. 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.
In addition, O’Reilly is involved in resolving governmental investigations that were being conducted against CSK and CSK’s former
officers and other litigation, prior to its acquisition by O’Reilly, as described below.
CSK Pre-Acquisition Matters – Governmental Investigations and Actions:
As previously reported, the governmental investigations of CSK regarding its legacy pre-acquisition accounting practices have
concluded.
CSK’s former Controller and its former Director of Credit and Receivables pled guilty to obstruction of justice on April 7, 2009 and
April 15, 2009, respectively, as previously reported. They were sentenced on November 7, 2011. CSK’s former Chief Financial
Officer was sentenced, as previously reported, on September 19, 2011. No appeal followed. Accordingly, with the sentencing on
November 7, 2011, criminal proceedings against former CSK employees have reached finality.
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, has also reached finality. On November 16, 2011, the Court entered a Final Judgment which required Mr.
Jenkins to reimburse $2.8 million to the Company as successor SEC issuer to CSK Auto Corp. Since entry of the Final Judgment, the
payment obligation created thereunder has been satisfied and O’Reilly has recorded the reimbursement as an adjustment to operating
income in the fourth quarter of 2011.
The previously reported SEC civil action for alleged misconduct related to CSK’s historical accounting practices against the former
Chief Financial Officer, Controller and Director of Credit and Receivables of CSK, remains ongoing. However, on January 20, 2012,
the parties filed a ―Joint Report On Settlement Talks‖ wherein they report that offers of settlement had been made which would be
presented to the Commission for its consideration and approval. The parties have requested a ―complete litigation standstill‖ while the
Commission considers the settlement offers made. Under Delaware law, the charter documents of the CSK entities, and certain
indemnification agreements, CSK may have certain indemnification obligations in connection with the SEC civil action, and, as a
result, O’Reilly is currently incurring legal fees in relation to the ongoing SEC litigation. 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 has incurred and expects to continue to incur additional legal fees and costs related to the
indemnity obligations arising from the litigation commenced by the DOJ and SEC against CSK’s former employees until final
resolution of the remaining matters. O’Reilly has a remaining reserve, with respect to the indemnification obligations of $14.1 million
at December 31, 2011, which relates to both expected additional legal fees and costs and to the payment of those legal fees and costs
already incurred.
FORM 10-K