Big Lots 2007 Annual Report Download - page 161

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73
BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11 — Discontinued operations (Continued)
The following table summarizes these charges and reversals:
2007 2006 2005
(In thousands)
Continuing Operations
HCC Note — Partial recovery (charge-off) ........................... $ 5,172 $ — $(6,389)
Discontinued Operations
Lease indemnifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,787 14,546 430
Tax indemnifications and other..................................... 125 5,425 —
Pittsfield distribution center ....................................... — (1,440) (999)
KB matters pretax income (loss) from discontinued operations .......... $12,912 $18,531 $ (569)
HCC Note — Partial Recovery (Charge-Off)
As partial consideration for our sale of the KB Toys business in 2000, we received a 10 year note from
Havens Corners Corporation, a subsidiary of KB Acquisition Corporation and a party to the 2003 bankruptcy
proceedings, in the aggregate principal amount of $45.0 million (principal and interest together known as the
“HCC Note”). Upon receipt, we recorded the HCC Note at its estimated fair value. The HCC Note became
immediately due and payable to us at the time of KB Toys’ bankruptcy filing in January 2004 and we recorded
a pretax charge in the amount of $9.6 million in 2003 to continuing operations to write-down the value of the
HCC Note to its then estimated fair value of $7.3 million. Under the KB Toys bankruptcy plan (“KB Plan”),
confirmed by the bankruptcy court on August 18, 2005, we expected to receive $0.9 million on our claim for
payment of the HCC Note from the bankruptcy trust. As a result, we recorded a pretax charge to continuing
operations in 2005 in the amount of $6.4 million to reduce the carrying value of the HCC Note to $0.9 million.
In the fourth quarter of 2006, we received $0.7 million as a result of our legal settlement with the former
principals of the KB Toys business and applied these proceeds against the carrying value of the HCC Note. In
the fourth quarter of 2007, we reached agreement with the KB Toys bankruptcy trust with respect to all of our
pending claims against the bankruptcy trust. As a result, we received approximately $7.2 million from the KB
Toys bankruptcy trust representing payment of our claims. Approximately $5.4 million of these proceeds related
to our HCC Note claim and $1.8 million related principally to our lease indemnification and mortgage guarantee
claims. The HCC Note proceeds were recorded as a $0.2 million payment against the outstanding note balance
and the remaining $5.2 million was recorded as a reduction of selling and administrative expenses for recovery
of the prior partial charge-offs. As of February 2, 2008, we no longer carried a balance on our consolidated
balance sheet for the HCC Note. The lease indemnification and mortgage guarantee proceeds of $1.8 million
were recorded as income from discontinued operations.
Lease Indemnifications
When we acquired the KB Toys business from Melville Corporation (now known as CVS New York, Inc., and
together with its subsidiaries “CVS”) in May 1996, we provided, among other things, an indemnity to CVS
with respect to any losses resulting from KB Toys’ failure to pay all monies due and owing under any KB Toys
lease or mortgage obligation. While we controlled the KB Toys business, we provided guarantees with respect
to a limited number of additional KB Toys store leases. As part of the sale of the KB Toys business by us, and
in accordance with the terms of the KB Stock Purchase Agreement, KB Toys similarly agreed to indemnify
us with respect to all lease and mortgage obligations. These guarantee and lease obligations are collectively
referred to as the “KB Lease Obligations.” In connection with the bankruptcy, KB Toys rejected 226 store
leases and two distribution center leases for which we believe we may have guarantee or indemnification
obligations (collectively referred to as the “KB bankruptcy lease obligations”). We estimated and recorded
pretax charges in discontinued operations of $24.4 million with respect to 90 leases rejected by KB Toys in