Dollar Tree 2008 Annual Report Download - page 24

22 DOLLAR TREE, INC. • 2008 ANNUAL REPORT
Management’s Discussion & Analysis of Financial Condition and Results of Operations
The bonds do not have a prepayment penalty as long
as the interest rate remains variable. The bonds con-
tain a demand provision and, therefore, outstanding
amounts are classified as current liabilities. We pay
interest monthly based on a variable interest rate,
which was 1.50% at January 31, 2009.
Interest on Long-term Borrowings. This amount repre-
sents interest payments on the Credit Agreement and
the revenue bond financing using the interest rates for
each at January 31, 2009.
Commitments
Letters of Credit and Surety Bonds. In March 2001,
we entered into a Letter of Credit Reimbursement
and Security Agreement, which provides $121.5
million for letters of credit. In December 2004, we
entered into an additional Letter of Credit
Reimbursement and Security Agreement, which pro-
vides $50.0 million for letters of credit. Letters of
credit are generally issued for the routine purchase of
imported merchandise and we had approximately
$97.8 million of purchases committed under these
letters of credit at January 31, 2009.
We also have approximately $26.5 million of let-
ters of credit or surety bonds outstanding for our self-
insurance programs and certain utility payment
obligations at some of our stores.
Freight Contracts. We have contracted outbound
freight services from various carriers with contracts
expiring through February 2013. The total amount of
these commitments is approximately $109.6 million.
Technology Assets. We have commitments totaling
approximately $3.2 million to primarily purchase
store technology assets for our stores during 2009.
Derivative Financial Instruments
On March 20, 2008, we entered into two $75.0 mil-
lion interest rate swap agreements. These interest rate
swaps are used to manage the risk associated with
interest rate fluctuations on a portion of our $250.0
million variable rate term loan. Under these agree-
ments, we pay interest to financial institutions at a
fixed rate of 2.8%. In exchange, the financial institu-
tions pay us at a variable rate, which approximates the
variable rate on the debt, excluding the credit spread.
These swaps qualify for hedge accounting treatment
pursuant to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. These swaps expire
in March 2011.
We are party to one additional interest rate swap,
which allows us to manage the risk associated with
interest rate fluctuations on the demand revenue
bonds. The swap is based on a notional amount of
$17.6 million. Under the $17.6 million agreement, as
amended, we pay interest to the bank that provided
the swap at a fixed rate. In exchange, the financial
institution pays us at a variable-interest rate, which is
similar to the rate on the demand revenue bonds. The
variable-interest rate on the interest rate swap is set
monthly. No payments are made by either party under
the swap for monthly periods with an established
interest rate greater than a predetermined rate (the
knock-out rate). The swap may be canceled by the
bank or us and settled for the fair value of the swap as
determined by market rates and expires in 2009.
Because of the knock-out provision in the $17.6
million swap, changes in the fair value of that swap are
recorded in earnings. For more information on the
interest rate swaps, see “Quantitative and Qualitative
Disclosures About Market Risk – Interest Rate Risk.”
Critical Accounting Policies
The preparation of financial statements requires the
use of estimates. Certain of our estimates require a
high level of judgment and have the potential to have
a material effect on the financial statements if actual
results vary significantly from those estimates.
Following is a discussion of the estimates that we
consider critical.
Inventory Valuation
As discussed in Note 1 to the Consolidated Financial
Statements, inventories at the distribution centers are
stated at the lower of cost or market with cost deter-
mined on a weighted-average basis. Cost is assigned to
store inventories using the retail inventory method on
a weighted-average basis. Under the retail inventory
method, the valuation of inventories at cost and the
resulting gross margins are computed by applying a
calculated cost-to-retail ratio to the retail value of
inventories. The retail inventory method is an averag-