Big Lots 2008 Annual Report Download - page 139

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11 — Discontinued Operations (Continued)
$2.0 million, pretax in income (loss) from discontinued operations to reflect favorable settlements related to the
KB-I Bankruptcy Lease Obligations. In the fourth quarter of 2007, we reversed approximately $8.8 million of
the KB-I Bankruptcy Lease Obligations to reduce the amount on our consolidated balance sheet to zero as of
February 2, 2008. We based this reversal on the following factors: 1) we had not received any new demand letters
from landlords during 2007, 2) all prior demands against us by landlords had been settled or paid or the landlords
had stopped pursuing their demands, 3) the KB-I bankruptcy occurred more than four years prior to the end of
2007 and most of the lease rejections occurred more than three years prior to the end of 2007, and 4) we believed
that the likelihood of new claims against us was remote, and, if incurred, the amount would be immaterial.
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 (with the new owner of the KB Toys
business 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 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 31 KB Toys stores (“KB-II Bankruptcy Lease Obligations”). In the fourth 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.
HCC Note
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 KBAC and a party to the KB-I 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-I 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-I 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-I 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.