Dollar General 2011 Annual Report Download - page 179

10-K
DOLLAR GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivative financial instruments (Continued)
Credit-risk-related contingent features
The Company has agreements with all of its interest rate swap counterparties that contain a
provision providing that the Company could be declared in default on its derivative obligations if
repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on
such indebtedness.
As of February 3, 2012, the fair value of interest rate swaps in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk related to these
agreements, was $11.1 million. If the Company had breached any of these provisions at February 3,
2012, it could have been required to post full collateral or settle its obligations under the agreements at
an estimated termination value of $11.1 million. As of February 3, 2012, the Company had not
breached any of these provisions or posted any collateral related to these agreements.
9. Commitments and contingencies
Leases
As of February 3, 2012, the Company was committed under operating lease agreements for most
of its retail stores. Many of the Company’s stores are subject to build-to-suit arrangements with
landlords which typically carry a primary lease term of 10-15 years with multiple renewal options. The
Company also has stores subject to shorter-term leases and many of these leases have renewal options.
Approximately 26% of the leased stores have provisions for contingent rentals based upon a specified
percentage of defined sales volume.
The land and buildings of the Company’s DCs in Fulton, Missouri and Indianola, Mississippi are
subject to operating lease agreements and the leased Ardmore, Oklahoma DC is subject to a financing
arrangement. The entities involved in the ownership structure underlying these leases meet the
accounting definition of a Variable Interest Entity (‘‘VIE’’). The Company is not the primary
beneficiary of these VIEs and, accordingly, has not included these entities in its consolidated financial
statements. Certain leases contain restrictive covenants. As of February 3, 2012, the Company is not
aware of any material violations of such covenants.
In January 1999, the Company sold its DC located in Ardmore, Oklahoma for cash and concurrent
with the sale transaction, the Company leased the property back for a period of 23 years. The
transaction is accounted for as a financing obligation rather than a sale as a result of, among other
things, the lessor’s ability to put the property back to the Company under certain circumstances. The
property and equipment, along with the related lease obligation associated with this transaction are
recorded in the consolidated balance sheets. In August 2007, the Company purchased a secured
promissory note (the ‘‘Ardmore Note’’) from an unrelated third party with a face value of $34.3 million
at the date of purchase which approximated the remaining financing obligation. The Ardmore Note
represents debt issued by the third party entity from which the Company leases the Ardmore DC and
therefore the Company holds the debt instrument pertaining to its lease financing obligation. Because a
legal right of offset exists, the Company is accounting for the Ardmore Note as a reduction of its
outstanding financing obligation in its consolidated balance sheets.
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