Dollar General 2007 Annual Report Download - page 44

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During 2005, we incurred significant losses caused by Hurricane Katrina, primarily
inventory and fixed assets, in the form of store fixtures and leasehold improvements. We reached
final settlement of our related insurance claim in 2006 and received proceeds totaling $21.0
million due to these losses, including $13.0 million in 2006 and $8.0 million in 2005, and have
utilized a portion of these proceeds to replace lost assets. Insurance proceeds related to fixed
assets are included in cash flows from investing activities and proceeds related to inventory
losses and business interruption are included in cash flows from operating activities.
Legal actions, claims and tax contingencies. As described in Note 7 to the Consolidated
Financial Statements, we are involved in a number of legal actions and claims, some of which
could potentially result in material cash payments. Adverse developments in those actions could
materially and adversely affect our liquidity. As discussed in Note 5 we also have certain
income tax-related contingencies as more fully described below under “Critical Accounting
Policies and Estimates.” Future negative developments could have a material adverse effect on
our liquidity.
Considerations regarding distribution center leases. The Merger and certain of the
related financing transactions may be interpreted as giving rise to certain trigger events (which
may include events of default) under our three distribution center leases. In that event, our
additional cost of acquiring the underlying land and building assets could approximate $112
million. At this time, we do not believe such issues would result in the purchase of these
distribution centers; however, the payments associated with such an outcome would have a
negative impact on our liquidity. To minimize the uncertainty associated with such possible
interpretations, we are negotiating the restructuring of these leases and the related underlying
debt. We have concluded that a probable loss exists in connection with the restructurings and
have recorded associated SG&A expenses in the Successor financial statements for the period
ended February 1, 2008 totaling $12.0 million. The ultimate resolution of these negotiations may
result in changes in the amounts of such losses, which changes may be material.
Credit ratings. On June 12, 2007 Standard & Poor’ s revised our long-term debt rating to
B, and left our long-term debt ratings on negative watch. Moody’ s revised our long-term debt
rating to B3 with a stable outlook. These current ratings are considered non-investment grade.
Our current credit ratings, as well as future rating agency actions, could (1) negatively impact
our ability to obtain financings to finance our operations on satisfactory terms; (2) have the effect
of increasing our financing costs; and (3) have the effect of increasing our insurance premiums
and collateral requirements necessary for our self-insured programs.
Cash flows
The discussion of the cash flows from operating, investing and financing activities
included below for 2007 is generally based on the combination of the Predecessor and Successor
for the 52-week period ended February 1, 2008, which we believe provides a more meaningful
understanding of our liquidity and capital resources for the time period presented.
Cash flows from operating activities. Cash flows from operating activities for 2007
compared to 2006 increased by $36.2 million, notwithstanding a decline in net income (loss) of