Dollar General 2008 Annual Report Download - page 50

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In August 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 prior to 2006, 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 8 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 leases for three of our distribution centers (“DCs”). We do
not believe such an interpretation would be appropriate under the terms of the leases. During the
2007 Successor period, we concluded that a probable loss existed in connection with the lease
contingencies and accrued SG&A expenses totaling $12.0 million in the Successor statement of
operations for the period ended February 1, 2008. As of January 30, 2009, $7.0 million of such
amount has been paid. We believe that we have negotiated with the property owners proposed
lease terms that would be implemented if the owners were to refinance or sell the property and
that the resolution of these negotiations is primarily dependent on conditions in the real estate
and financial markets. We believe that any remaining potential loss on the resolution of these
matters would currently be properly categorized as reasonably possible rather than probable and
therefore reversed the remaining $5.0 million of previously recorded SG&A expenses during the
year ended January 30, 2009. However, the possibility remains that the ultimate resolution of
these matters could require us to make a significant cash investment to purchase these DCs.
Credit ratings. On December 15, 2008 Standard & Poor’ s revised our long-term debt
rating outlook to positive from stable and affirmed our long-term rating of B. On September 18,
2008 Moody’ s affirmed our long-term debt rating of B3 and changed the outlook to positive
from stable. 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
Cash flows from operating activities. A significant component of the change in cash
flows from operating activities in 2008 compared to the 2007 periods was our strong operating
performance due to greater sales, higher gross margins and lower SG&A expenses as a
percentage of sales, partially offset by significantly higher interest expense, as described in more