Big Lots 2010 Annual Report Download - page 144

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BIG LOTS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Note 11 — Discontinued Operations (Continued)
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. We sold the KB Toys
business to KB Acquisition Corp. (“KBAC”), an affiliate of Bain Capital, pursuant to a Stock Purchase
Agreement. KBAC 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.”
On January 14, 2004, KBAC and certain affiliated entities (collectively referred to as “KB-I”) filed for
bankruptcy protection pursuant to Chapter 11 of title 11 of the United States Code. In connection with the
2004 bankruptcy, KB-I rejected 226 store leases and two distribution center leases for which we believed we
may have guarantee or indemnification obligations (collectively referred to as the “KB-I Bankruptcy Lease
Obligations”). We recorded pretax charges for estimated KB-I Bankruptcy Lease Obligations in loss from
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 a gain of $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 in 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 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 2010 and 2009, we had accrued in total for the KB-II Bankruptcy Lease
Obligations and the KB corporate office lease obligation $3.6 million and $4.8 million, respectively.