Dollar Tree 2007 Annual Report Download - page 24

22 DOLLAR TREE, INC. • 2007 ANNUAL REPORT
Management’s Discussion & Analysis of Financial Condition and Results of Operations
specified financial ratios, restricts the payment of
certain distributions and prohibits the incurrence of
certain new indebtedness. Our March 2004, $450.0
million unsecured revolving credit facility was termi-
nated concurrent with entering into the Agreement.
Revenue Bond Financing. In May 1998, we entered
into an agreement with the Mississippi Business
Finance Corporation under which it issued $19.0 mil-
lion of variable-rate demand revenue bonds. We used
the proceeds from the bonds to finance the acquisi-
tion, construction and installation of land, buildings,
machinery and equipment for our distribution facility
in Olive Branch, Mississippi. At February 2, 2008, the
balance outstanding on the bonds was $18.5 million.
These bonds are due to be fully repaid in June 2018.
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 3.38% at February 2, 2008.
Interest on Long-term Borrowings. This amount repre-
sents interest payments on the revolving credit facility
and the revenue bond financing using the interest
rates for each at February 2, 2008.
Commitments
Letters of Credit and Surety Bonds. In March 2001,
we entered into a Letter of Credit Reimbursement
and Security Agreement, which provides $125.0 mil-
lion 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
$88.9 million of purchases committed under these let-
ters of credit at February 2, 2008.
We also have approximately $19.8 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 $191.2 million.
Technology Assets. We have commitments totaling
approximately $5.1 million to primarily purchase
store technology assets for our stores during 2008.
Derivative Financial Instruments
We are party to one 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 $18.5 million. Under
the $18.5 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 $18.5
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.”
On March 20, 2008, we entered into two $75.0
million 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 note. 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.
We believe these swaps are highly effective as the
interest reset dates and the underlying interest rate
indices are identical for the swaps and the debt. These
swaps qualify for hedge accounting treatment pur-
suant to SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. These swaps expire
in March 2011.