Big Lots 2007 Annual Report Download - page 162

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11 — Discontinued operations (Continued)
2003 and $8.6 million with respect to 72 leases rejected by KB Toys in 2004. In 2005, an additional 33 store
leases and two distribution center leases were rejected. During 2005, we reversed approximately $0.4 million
of the KB bankruptcy lease obligation originally providing for professional fees that were no longer expected
to be incurred. During 2006, we reversed approximately $14.5 million of the KB bankruptcy lease obligation
to reflect the revised estimated amount expected to be paid by us. We based the revision of the KB bankruptcy
lease obligation on the number of demand notices that we had received from landlords and used information
received from KB Toys, the bankruptcy trust, and our own lease records which date back to when we owned the
KB Toys business. In the second quarter of 2007, we recorded $2.0 million, pretax, as income from discontinued
operations to reflect favorable settlements of KB Toys bankruptcy lease obligations. In the fourth quarter of
2007, we reversed approximately $8.8 million of the KB bankruptcy lease obligation to reduce the amount
on our consolidated balance sheet to zero as of February 2, 2008. While we are still obligated to perform, if
presented with a valid claim, under the guarantee and indemnification agreements with respect to these rejected
leases, we believe that the likelihood of any additional payments that we will be required to make as a result of
these rejected leases is remote.
We continue to have KB Lease Obligations with respect to approximately 52 open KB Toys stores. In 2007, we
entered into an agreement with KB Toys and various Prentice Capital entities (owners/affiliates of KB Toys)
which we believe provides for a cap of our liability under the existing KB Toys guaranteed store leases and an
indemnification from the Prentice Capital entities with respect to any renewals, extensions, modifications, or
amendments of these guaranteed leases which could potentially add incremental liability to us beyond the date
of the agreement, September 24, 2007. Under these agreements, KB Toys is required to update us periodically
with respect to the status of any remaining leases which they believe we have guaranteed. In addition, we
have the right to request the net asset value of Prentice Capital Offshore in order to monitor the sufficiency
of its indemnification. Because our guarantee of KB Toys leases was issued prior to January 1, 2003, it is not
subject to the fair value recognition provisions of FIN No. 45. However, we will recognize a liability if a loss in
connection with any of the KB Lease Obligations becomes probable and reasonably estimable.
Pittsfield Distribution Center
As a result of our guarantee of a mortgage obligation on one of KB Toy’s distribution centers and the KB Toys
bankruptcy, we received notice of a default relating to a first mortgage (guaranteed by CVS) on the Pittsfield,
Massachusetts distribution center (“Pittsfield DC”). On November 5, 2004, we satisfied our indemnity
obligation with respect to the Pittsfield DC with a payment of $8.4 million. We recorded a pretax charge to
discontinued operations in 2004 in the amount of $2.7 million to reflect our best estimate of the difference
between the subrogation rights flowing from the indemnification payment and the net realizable value of the
Pittsfield DC.
In the fourth quarter of 2005, we initiated plans to dispose of the Pittsfield DC. The property was classified as
held-for-sale, and accordingly, its carrying value was adjusted to its estimated fair value less applicable selling
costs resulting in a pretax non-cash impairment charge of $0.7 million and other related charges of $0.3 million
included in loss from discontinued operations. In the fourth quarter of 2006, we sold the Pittsfield DC for
approximately $3.9 million, net of selling costs and recognized a $1.4 million loss, net of tax included in income
from discontinued operations.
Other KB Toys Matters
In addition to including KB Toys’ indemnity of us with respect to lease and mortgage obligations, the KB
Stock Purchase Agreement contains mutual indemnifications of KB Toys by us and of us by KB Toys. These
indemnifications relate primarily to losses arising out of general liability claims, breached or inaccurate
representations or warranties, shared litigation expenses, other payment obligations, and taxes. Under a tax
indemnification provision in the KB Stock Purchase Agreement, we were to indemnify KB Toys for tax