Big Lots 2009 Annual Report Download - page 189

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11 — Discontinued Operations (Continued)
discontinued operations of $18.1 million in years prior to 2007. We based this amount on the number of demand
notices that we had received from landlords and used information received from KB-I, the bankruptcy trust, and
our own lease records which date back to when we owned the KB Toys business.
In the second fiscal quarter of 2007, we recorded $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 fiscal
quarter of 2007, we recorded approximately $8.8 million income 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 (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 31 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 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 2009 and 2008, we had accrued in total for the KB-II Bankruptcy Lease
Obligations and the KB corporate office lease obligation $4.8 million and $5.0 million, respectively.
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. From 2004 through 2006 we recorded $16.0 million
of impairments in continuing operations and 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 recorded.