Big Lots 2011 Annual Report Download - page 187

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 13 — Discontinued Operations (Continued)
On August 30, 2005, in connection with the acquisition by an affiliate of Prentice Capital Management of
majority ownership of KB-I, KB-I emerged from its 2004 bankruptcy (the KB Toys business that emerged
from bankruptcy is hereinafter referred to as “KB-II”). In 2007, we entered into an agreement with KB-II and
various Prentice Capital entities which we believe provides a cap on our liability under the existing KB Lease
Obligations and an indemnity from the Prentice Capital entities with respect to any renewals, extensions,
modifications or amendments of the KB Lease Obligations which otherwise could potentially expose us to
additional incremental liability beyond the date of the agreement, September 24, 2007. Under the agreement,
KB-II is required to update us periodically with respect to the status of any remaining leases for which they
believe we have a guarantee or indemnification obligation. In addition, we have the right to request a statement
of the net asset value of Prentice Capital Offshore in order to monitor the sufficiency of the indemnity.
On December 11, 2008, KB-II filed for bankruptcy protection pursuant to Chapter 11 of title 11 of the United
States Code. Based on information provided to us by KB-II, we believe that we continue to have KB Lease
Obligations with respect to 29 KB Toys stores (“KB-II Bankruptcy Lease Obligations”). In the fourth fiscal
quarter of 2008, we recorded a charge in the amount of $5.0 million, pretax, in income (loss) from discontinued
operations to reflect the estimated amount that we expect to pay for KB-II Bankruptcy Lease Obligations. We
continue to believe that additional payments by us under the KB-I Bankruptcy Lease Obligations are remote
and, therefore we have not recognized any charge or liability in 2008 related to these earlier lease rejections.
In the fourth fiscal quarter of 2009, we obtained an assignment of a lease for the former KB corporate office.
We believe that our ability to find a subtenant for this location is remote. We recorded a charge of $1.2 million,
pretax in income (loss) from discontinued operations primarily related to our remaining liability for the former
KB corporate office. At fiscal year end 2011 and 2010, we had accrued in total for the KB-II Bankruptcy Lease
Obligations and the KB corporate office lease obligation $3.1 million and $3.6 million, respectively.
Note 14 — Sales of Real Estate
In September 2006, to avoid litigation under the threat of eminent domain, we sold a company-owned and
operated store in California for an approximate gain of $12.8 million. As part of the sale, we entered into a lease
which permitted us to occupy and operate the store through January 2009 in exchange for $1 per year rent plus
the cost of taxes, insurance, and common area maintenance. Subsequently, this lease was modified to allow us
to occupy this space through September 2009 under substantially the same terms. Because of the favorable lease
terms, we deferred recognition of the gain until we no longer held a continuing involvement in the property. As
a result, the gain on the sale was deferred until the end of the lease and the net sales proceeds of approximately
$13.3 million were recorded as a long-term real estate liability included in other liabilities on our consolidated
balance sheet in prior years. In the third fiscal quarter of 2009, after attempts to further extend the lease term
were unsuccessful, we closed the store, ending our continuing involvement with this property, and recognized a
pretax gain on sale of real estate of $13.0 million.