Dollar General 2007 Annual Report Download - page 88

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DC leases. In such event, the Company’ s net cost of acquiring the underlying assets could
approximate $112 million. At this time, the Company does not believe the resolution of such
issues would result in the purchase of these DCs; however, the payments associated with such an
outcome would have a negative impact on the Company’ s liquidity. To minimize the uncertainty
associated with such possible interpretations, the Company is negotiating the restructuring of
these leases and the related underlying debt. The Company has concluded that a probable loss
exists in connection with the restructurings and has recorded expenses totaling $12.0 million in
SG&A expenses in the Successor statement of operations for the period ended February 1, 2008.
The ultimate resolution of these negotiations may result in changes in the amounts of such losses,
and such changes may be material.
In January 1999 and April 1997, the Company sold its DCs located in Ardmore,
Oklahoma and South Boston, Virginia, respectively, for 100% cash consideration. Concurrent
with the sale transactions, the Company leased the properties back for periods of 23 and 25
years, respectively. The transactions were recorded as financing obligations rather than sales as
a result of, among other things, the lessor’ s ability to put the properties back to the Company
under certain circumstances. The property and equipment, along with the related lease
obligations, associated with these transactions were recorded in the consolidated balance sheets.
In August 2007, the Company purchased a secured promissory note (the “Ardmore
Note”) from Principal Life Insurance Company, which had a face value of $34.3 million at the
date of purchase and approximated the remaining financing obligation. The Ardmore Note
represents debt issued by the third party entity from which the Company leases the Ardmore DC.
The Ardmore Note is being accounted for as a “held to maturity” debt security in accordance
with the provisions of SFAS 115, “Accounting for Certain Investments in Debt and Equity
Securities” (see Note 1). However, by acquiring the Ardmore Note, the Company holds the debt
instrument pertaining to its lease financing obligation and, because a legal right of offset exists,
is accounting for the acquired Ardmore Note as a reduction of its outstanding financing
obligations in its consolidated balance sheet as of February 1, 2008 in accordance with the
provisions of FASB Interpretation 39, “Offsetting of Amounts Related to Certain Contracts – An
Interpretation of APB Opinion 10 and FASB Statement 105.”
In May 2003, the Company purchased two secured promissory notes (the “South Boston
Notes”) from Principal Life Insurance Company totaling $49.6 million. The South Boston Notes
represented debt issued by the third party entity from which the Company leased the South
Boston DC. In June 2006, the Company acquired the third party entity, which owned legal title
to the South Boston DC assets and had issued the related debt in connection with the original
financing transaction. There was no material gain or loss recognized as a result of this
transaction. Based on the Company’ s ownership of the third party entity at February 1, 2008, the
financing obligation and South Boston Notes are eliminated in the Company’ s consolidated
financial statements.