Dollar General 2004 Annual Report Download - page 42

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Notes to Consolidated Financial Statements (continued)
Insurance claims provisions
The Company retains a significant portion of risk for its
workers’ compensation, employee health, general liability,
property and automobile claim exposures. Accordingly,
provisions are made for the Company’s estimates of such
risks. Actuaries are utilized to determine the undiscounted
future claim costs for the workers’ compensation, general
liability, and health claim risks. To the extent that subse-
quent claim costs vary from those estimates, future
results of operations will be affected. The Greater
Cumberland Insurance Company (“GCIC”), a Vermont-
based wholly-owned captive insurance subsidiary of the
Company, charges the operating subsidiary companies
premiums to insure the retained workers’ compensation
and non-property general liability exposures. GCIC
currently insures no unrelated third-party risk.
Fair value of financial instruments
The carrying amounts reflected in the consolidated
balance sheets for cash, cash equivalents, short-term
investments, receivables and payables approximate their
respective fair values. At January 28, 2005 and January
30, 2004, the fair value of the Company’s debt, exclud-
ing capital lease obligations, was approximately $278.7
million and $265.4 million, respectively, (net of the fair
value of a note receivable on the South Boston, Virginia
DC of approximately $50.0 million and $48.9 million,
respectively, as discussed in Note 8) based upon the
estimated market value of the debt at those dates.
Such fair value exceeded the carrying values of the
debt at January 28, 2005 and January 30, 2004 by
approximately $35.5 million and $21.7 million, respec-
tively. Fair values are based primarily on quoted prices
for those or similar instruments. A discussion of the
carrying value and fair value of the Company’s derivative
financial instruments is included in the section entitled
“Derivative financial instruments” below.
Derivative financial instruments
The Company accounts for derivative financial instru-
ments in accordance with the provisions of SFAS No.
133, “Accounting for Derivative Instruments and Hedging
Activities”, as amended by SFAS Nos. 137, 138 and 149
and interpreted by numerous Financial Accounting
Standards Board (“FASB”) Issues. These statements
require the Company to recognize all derivative instru-
ments on the balance sheet at fair value, and contain
accounting rules for hedging instruments, which depend
on the nature of the hedge relationship.
The Company has historically used derivative financial
instruments primarily to reduce its exposure to adverse
fluctuations in interest rates and, to a much lesser extent,
other market exposures.
As a matter of policy, the Company does not buy or sell
financial instruments, including derivatives, for speculative
or trading purposes and all financial instrument transac-
tions must be authorized and executed pursuant to the
approval of the Board of Directors. All financial instrument
positions taken by the Company are used to reduce
risk by hedging an underlying economic exposure and
are structured as straightforward instruments with liquid
markets. The Company primarily executes derivative
transactions with major financial institutions.
For a portion of fiscal year 2002, the Company was party
to an interest rate swap agreement with a notional amount
of $100 million. The Company designated this agreement
as a hedge of the floating rate commitments relating to a
portion of certain synthetic lease agreements that existed
at that time. Under the terms of the agreement, the
Company paid a fixed rate of 5.60% and received a float-
ing rate (LIBOR) on the $100 million notional amount
through September 1, 2002. This interest rate swap
matured in September 2002, and, as of January 28, 2005,
the Company had no outstanding derivative financial
instruments. While outstanding, this derivative was 100%
effective in hedging the floating rate commitments relating
to the underlying exposure being hedged. Accordingly, no
hedge ineffectiveness was recognized by the Company
relating to this hedging relationship.
The following table summarizes activity in Accumulated
other comprehensive loss during 2004 related to deriva-
tive transactions used by the Company in prior periods
to hedge cash flow exposures relating to certain debt
transactions (in thousands):
Before-Tax
Amount
Income
Tax
After-Tax
Amount
Accumulated net losses as
of January 30, 2004 $(1,825) $664 $(1,161)
Net losses reclassified from
Other comprehensive
loss into earnings 286 (98) 188
Accumulated net losses as
of January 28, 2005 $(1,539) $566 $ (973)