O'Reilly Auto Parts 2013 Annual Report Download - page 26

FORM 10-K
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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 4,166 stores that we operated at December 31, 2013, 1,469 stores were owned, 2,620 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 three of the eight 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 April 30, 2014, 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 24 existing DCs is approximately 4,400 stores, providing a growth capacity of more
than 225 stores, which increased by 300 stores with the completion of our Lakeland, Florida, DC in January of 2014 and will increase
by 250 stores with the completion of our Chicago, Illinois, DC and 210 stores with the completion of our Devens, Massachusetts, DC,
both of which are expected to open in the second half of 2014. We believe the growth capacity in our 24 existing DCs, along with the
additional capacity of our new Lakeland, Chicago and Devens DCs, 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 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 was involved in resolving governmental investigations that were being conducted against CSK Auto Corporation
("CSK") and CSK’s former officers and other litigation, prior to its acquisition by O’Reilly in 2008, as described below.
As previously reported, the governmental investigations of CSK regarding its legacy pre-acquisition accounting practices have concluded.
All criminal charges against former employees of CSK related to its legacy pre-acquisition accounting practices, as well as the civil
litigation filed against CSK’s former Chief Executive Officer by the Securities and Exchange Commission (the “SEC”), have concluded.
Under Delaware law, the charter documents of the CSK entities and certain indemnification agreements, CSK may have certain
indemnification obligations. As a result of the CSK acquisition, O’Reilly has incurred legal fees and costs related to these potential
indemnification obligations arising from the litigation commenced by the Department of Justice and SEC against CSK’s former employees.
Whether those legal fees and costs are covered by CSK’s insurance is subject to uncertainty, and, given its complexity and scope, the
final outcome cannot be predicted at this time. O’Reilly has a remaining reserve, with respect to the indemnification obligations of $13.4
million at December 31, 2013, which relates to the payment of those legal fees and costs already incurred. 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 resolution of such matter,
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 this matter, after consideration of applicable reserves, should not have a material adverse effect on the Company’s
consolidated financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.